Section 42 LIHTC Program: Complete Guide for Property Managers & Investors

If you own, develop, or manage affordable rental housing in Hawaii, Section 42 LIHTC compliance affects how units are qualified, how rents are calculated, and how property records are maintained. The federal Low Income Housing Tax Credit program provides credits for qualifying residential rental buildings. Owners claim the credit over a 10-year credit period, while the federal compliance period lasts 15 years.

Hawaii adds its own application, monitoring, and program requirements through the Hawaii Housing Finance and Development Corporation (HHFDC). We manage affordable housing across four islands and have worked with LIHTC programs for more than 20 years. This guide explains the core rules and what they mean for day-to-day property management.

What Is Section 42 LIHTC?

Section 42 of the Internal Revenue Code established the Low Income Housing Tax Credit. The program supports the development and preservation of rental housing with income and rent restrictions.

The federal framework includes a 10-year credit period and a 15-year compliance period. Owners also face extended-use requirements that can keep a project affordable beyond the federal compliance period. The exact affordability commitment depends on the project documents and applicable state requirements.

For Hawaii projects, HHFDC administers the state LIHTC process. Developers should use the current HHFDC Qualified Allocation Plan (QAP) and funding-round documents when preparing an application because requirements can change from one cycle to another.

How Do LIHTC Properties Qualify?

Section 42 uses income and rent restrictions to determine which units qualify. Two common minimum set-aside tests are the 20% test, under which at least 20% of the units are occupied by households at or below 50% of area median income, and the 40% test, under which at least 40% of the units are occupied by households at or below 60% of area median income.

A project may also use other elections and restrictions permitted under Section 42. The applicable project documents control the requirements for a specific property.

HHFDC states that LIHTC rents are restricted by unit size and annual HUD-established AMI. When tenants pay utilities, rent must be adjusted by the applicable utility allowance.

How Do Income and Rent Limits Work in Hawaii?

Income limits change, so a number that was correct in a previous year should not be carried into a 2026 article without checking the current schedule. HHFDC’s 2026 Honolulu County guidelines list a 60% income limit of $64,680 for a one-person household. The four-person limit is $92,400 under the 2026 schedule.

Those figures are examples, not universal Hawaii limits. Limits vary by county, household size, and AMI percentage. Rent limits also vary by unit size and the applicable utility allowance.

For a property manager, the practical job is to use the current limits that apply to the property and document the calculation. For a resident, the key question is whether your household income and other eligibility factors fit the requirements for the specific unit.

What Must Owners Track During Compliance?

LIHTC compliance does not end after a qualified tenant moves in. Owners and managers must maintain records that support household eligibility, rent calculations, and ongoing compliance.

The IRS uses Form 8609 for housing credit allocation and certification. Building owners file Form 8609-A for each year of the 15-year compliance period to report compliance and calculate the credit.

Key management tasks include:

• Reviewing applicant income and eligibility before move-in.
• Maintaining required tenant records and certifications.
• Applying the correct rent and utility allowance.
• Monitoring unit status and project requirements.
• Addressing identified compliance issues within the applicable correction period.
• Maintaining records required by federal and state rules.

A household’s income can change after move-in. That does not automatically mean the resident must leave. Section 42 includes rules that can affect the treatment of an over-income household, including the next available unit rule. The specific result depends on the property’s applicable fraction, project documents, and the facts of the household.

Student eligibility also requires attention. Federal rules generally restrict households composed entirely of full-time students unless a statutory exception applies. Documentation should support any applicable exception.

How Does LIHTC Financing Work?

LIHTC financing can involve competitive 9% credits and 4% credits associated with tax-exempt bond financing. The applicable structure depends on the project and current federal and state requirements.

Developers should not rely on a fixed credit price, investor return, or financing percentage from an older article. Those figures can change with market conditions and transaction terms.

The current IRS instructions also contain specific rules for projects financed with tax-exempt bonds. Because the rules can differ based on the bond financing and project facts, developers should review the current IRS guidance and HHFDC requirements before selecting a financing structure.

For Hawaii developers, the 2026 HHFDC QAP is the starting point for current state allocation criteria. HHFDC’s 2026 consolidated application materials also provide the current funding-round schedule and submission requirements.

What Should Developers Review Before Applying?

Before an application is prepared, developers should start with the current HHFDC QAP and the funding-round instructions. Review the eligible applicant requirements, project requirements, scoring criteria, required forms, deadlines, and documentation requirements that apply to the round.

The 2026 HHFDC funding materials use a formal application process with published deadlines and submission procedures. An older checklist or funding-round calendar should not be treated as current.

Developers should also separate federal requirements from project-specific requirements. Section 42 establishes the federal framework, while the QAP, allocation documents, regulatory agreements, and other project documents can add requirements that continue throughout the property’s affordability period.

That distinction matters after construction and lease-up. A management procedure that worked for one project may not be sufficient for another project with different financing or layered programs. We recommend starting with the documents governing the specific property rather than relying on a general LIHTC checklist.

What Happens When a Compliance Issue Is Found?

A compliance issue should be documented and addressed under the applicable federal and state procedures. The response depends on the type of finding, when it occurred, whether it can be corrected, and the rules governing the property.

The IRS uses Form 8823 for housing credit agency reporting of noncompliance. Owners should not assume every finding has the same tax consequence. The effect depends on the facts and the applicable Section 42 rules.

That is why organized records matter. A complete file can help management establish what information was reviewed, what calculation was used, and what corrective action was taken. It also gives owners a clearer record during a state monitoring review.

How HAPI Supports LIHTC Properties

We manage more than 4,000 apartments in 33 projects statewide, with properties on Oahu, the Big Island, Maui, and Kauai. We have worked with LIHTC programs for more than 20 years and currently manage eight tax credit projects in Hawaii.

Our approach starts with trained staff and documented procedures. We send tax credit staff to annual workshops, use Spectrum Professional Tax Credit Consulting Service, and support project staff as they work through program rules. Our team also has experience administering other rental assistance programs, so we understand how requirements can overlap when programs are layered on one property.

HAPI Tools for Housing and Budget Planning

Our online tools can help residents and property stakeholders organize questions about eligibility, income, household costs, resources, and payment impacts. The tools include:

Use the appropriate tool for planning, then confirm property-specific LIHTC requirements with the property’s management team or the applicable agency.