What Are the IRS Section 42 Income Limits?

The Low-Income Housing Tax Credit (LIHTC) program, established under Section 42 of the Internal Revenue Code, is a federal initiative designed to foster the development and rehabilitation of affordable rental housing. Created by the Tax Reform Act of 1986, the program does not provide direct rental subsidies to tenants. Instead, it offers a dollar-for-dollar reduction in federal tax liability to private developers and investors. In exchange for receiving these tax credits, property owners must set aside a percentage of their units for low-income households and cap the rents.

Understanding the Income Limit Framework

Eligibility for a Section 42 property is not based on a single, national income figure. Instead, the limits are localized and tied to the Area Median Income (AMI) for a specific county or metropolitan area. The U.S. Department of Housing and Urban Development (HUD) calculates and publishes these AMI figures annually, ensuring the definition of “low-income” reflects the typical earnings within that community.

When planning a property, developers must make an irrevocable election, known as a minimum set-aside, that dictates the income and occupancy requirements. Developers typically choose one of three tests. The first is the “20-50 test,” where at least 20% of the project’s units must be rented to households with an income at or below 50% of the AMI. The second is the “40-60 test,” requiring at least 40% of units to be rented to households at or below 60% of the AMI. A third option, the Average Income Test, also requires at least 40% of units to be set aside but provides more flexibility by allowing income limits to be varied as long as the average does not exceed 60% of the AMI.

These percentages are then translated into specific dollar amounts that are further adjusted based on household size. The baseline is typically the four-person household limit, and this figure is adjusted upward for larger households and downward for smaller ones. For example, if the 60% AMI limit for a four-person household in a county is $50,000, the limit for a two-person household will be significantly lower, while the limit for a six-person household will be higher.

Calculating Your Household’s Annual Income

To determine eligibility, you must calculate your household’s gross annual income according to program rules. This includes anticipated income for the next 12 months for all household members, excluding live-in aides. Countable income sources include wages, salaries, tips, unemployment benefits, Social Security payments, pensions, alimony, and regular cash contributions from individuals not living in the unit.

A specific rule applies to how assets are treated. All assets must be declared, and if their total cash value exceeds $5,000, a special calculation is required. The property manager determines the “imputed income from assets” by multiplying the total cash value by a passbook savings rate set by HUD. The amount included in your annual income calculation will be the greater of either the actual income generated by the assets or this imputed income figure.

Certain types of income are explicitly excluded from this calculation. Common examples of excluded income include payments from the Supplemental Nutrition Assistance Program (food stamps), student financial assistance paid directly to the educational institution, sporadic gifts, and payments received for the care of foster children.

Finding the Official Limits for Your Area

The official income limits for the LIHTC program are published annually by HUD, and the figures are released in the spring. Prospective tenants can find the precise income limits applicable to their geographic area and household size by using the data tools available on HUD’s website.

To find the correct figures, navigate to the income limits data page on the HUD User portal. Select the most recent fiscal year, then choose your state and the specific county or metropolitan area. The system will generate a report with the income limit data for that location.

Within the report, you will need to locate the table for the “Multifamily Tax Subsidy Projects” (MTSP), as this is the correct dataset for Section 42 properties. The table is organized with household sizes listed in rows and AMI percentages in columns. By cross-referencing your household size with the required AMI level, you can find the maximum annual income for eligibility.

Tenant Certification and Post-Move-In Rules

Verifying eligibility begins when you apply for a Section 42 unit. The property manager will require you to complete an application, including an income and asset questionnaire and a student status declaration. Management must obtain third-party verification for all reported income and assets. Once eligibility is confirmed, you will sign a Tenant Income Certification (TIC) attesting to the information’s accuracy.

For most properties, your income is recertified annually. An exception exists for properties where 100% of the units are designated for LIHTC residents, as these may not require annual income recertification. If a household’s income increases after moving in, they are generally not required to move out. If the income surpasses 140% of the current income limit for their household size, the “Next Available Unit Rule” is triggered. This rule requires the owner to rent the next comparable, available unit to a new, income-qualified household.

The program also has regulations regarding student occupancy. A unit occupied entirely by full-time students is generally not eligible unless the household meets one of five exceptions:

• The students are married and eligible to file a joint tax return.
• They are single parents with dependent children.
• They receive TANF assistance.
• They are part of a government job training program.
• They were previously in foster care.