Section 42 Properties: Special Protections in Texas Property Tax Protests

Low-Income Housing Tax Credit (LIHTC) properties — commonly called Section 42 properties after the Internal Revenue Code section that governs them — present one of the most challenging and consequential property tax assessment situations in Texas. Owners and investors in these affordable multifamily housing developments face a structural problem: the income restrictions that are central to the Section 42 program directly suppress the income the properties can generate, while appraisal districts may value the properties as if those restrictions don’t exist.

The resulting overassessment doesn’t just affect investor returns — it threatens the financial viability of affordable housing developments and can force developers to raise rents (to the extent the program allows) or allow properties to deteriorate as operating costs outpace restricted income.

Texas law and Texas courts have addressed this problem, but property owners must actively use the available tools.

The Core Problem: Restricted Income and Market Value

Section 42 housing is required, as a condition of receiving tax credits, to rent units at restricted rates to qualifying low-income households. The maximum rents are set as percentages of Area Median Income (AMI) — typically 50% or 60% AMI for the qualifying units. These rents are substantially below what the same units would command in the open market.

Under Texas Tax Code §23.01, commercial real property must be appraised at market value — defined as the price a property would bring in an arm’s-length transaction between a knowledgeable buyer and seller. The question that drives Section 42 property tax disputes: what market value does a knowledgeable buyer assign to a property encumbered by long-term rental restrictions that suppress its income?

The answer, according to the weight of appraisal theory, Texas court decisions, and common sense, is: a value reflecting the restricted income stream, not the unrestricted income the property could theoretically generate if the Section 42 restrictions didn’t exist.

This principle — that encumbrances affecting income should be considered in market value appraisal — is supported by:

Texas Tax Code §23.01(b): “The market value of property shall be determined by the application of generally accepted appraisal methods and techniques.” Generally accepted appraisal methodology under USPAP requires the appraiser to consider the actual income stream of the property, including the effect of any encumbrances that transfer with the property.

The “willing buyer, willing seller” standard. A knowledgeable buyer acquiring a Section 42 property buys it with full knowledge of the income restrictions. The buyer would not pay the same price for a restricted property as for an equivalent unrestricted market-rate property. The market value is the price a buyer would pay — which is the price adjusted for the restrictions.

Texas case law. Texas courts have addressed the income restriction valuation issue in multiple cases, with decisions generally supporting the principle that income restrictions must be considered in market value determinations for Section 42 properties.

The “Hypothetical Unencumbered Fee Simple” Problem

Despite the legal and appraisal theory support for restricted income valuation, many Texas appraisal districts continue to value Section 42 properties using market rents rather than restricted rents. This “hypothetical unencumbered fee simple” approach — valuing the property as if it were not subject to income restrictions — is one of the most common sources of overassessment in the affordable housing sector.

The gap between restricted and market-rate rents can be substantial. In markets where market rents significantly exceed AMI thresholds — Austin, Houston, Dallas, and other high-cost Texas markets — the gap between what Section 42 units must charge and what the market would support can be $200 to $600 or more per unit per month. On a 100-unit development, that’s $2.4 million to $7.2 million in annual income difference. Capitalized at a market cap rate, the difference in assessed value can exceed $30 million.

Even in secondary and rural Texas markets, the rent differential is typically 15% to 35% below market rates. This differential has a direct, material impact on the property’s income-approach market value — and on the accuracy of an assessment that ignores it.

Texas Tax Code §23.012: The Restricted Value Statute

Texas Tax Code §23.012, enacted by the Legislature to address this precise issue, provides that when appraising a low-income housing tax credit property, the appraisal district must consider the income restrictions imposed as a condition of the credit and must base the appraisal on the actual income generated under the restricted rents, not on hypothetical market rents.

This statutory protection is significant — but it requires active use. The property owner must:

1. Notify the appraisal district that the property qualifies as a Section 42 property subject to §23.012 treatment
2. Provide the necessary documentation (Form 8609, the LURA or extended use agreement, current restricted rent schedules)
3. Verify that the district has applied the restricted income methodology rather than the hypothetical market rate approach

If the appraisal district applies market rents despite §23.012, the property owner’s protest case is particularly strong — the district is applying a methodology that Texas law prohibits for this property type.

The Extended Use Agreement as a Legal Encumbrance

When a developer receives Section 42 tax credits, they execute a Land Use Restriction Agreement (LURA), also called an Extended Use Agreement, that runs with the property and binds all future owners. This agreement — recorded in the county deed records — restricts:

• Unit rents to AMI-based maximums
• Tenant eligibility to households below specified income limits
• Property use to residential housing for qualifying low-income households

The LURA typically runs for 30 years from the placed-in-service date, with a 15-year extended use period built into the initial credit allocation. For properties in the compliance period or extended use period, the restrictions are legally binding on the current owner and any buyer — they cannot be negotiated away without triggering significant legal and tax consequences.

Because the LURA runs with the land, it is an encumbrance that any buyer takes subject to. Under market value principles, a knowledgeable buyer would discount the purchase price to reflect the restricted income stream imposed by the LURA. This is the foundation of the restricted value argument.

Unequal Appraisal: An Additional Argument for Section 42 Properties

Beyond the market value argument, Section 42 property owners may also have unequal appraisal claims under Texas Tax Code §41.43(b)(3).

If the appraisal district values market-rate comparable multifamily properties using income approach methodology that reflects actual market rents, but values Section 42 properties using the same market rents rather than the restricted rents, then the appraisal ratios for Section 42 properties will be systematically higher than for market-rate properties. This disparity supports an unequal appraisal claim.

The argument: Section 42 properties are being appraised at a higher ratio of income-producing capacity (actual restricted NOI versus assessed value) than market-rate properties, which violates the equal and uniform treatment requirement of the Texas Property Tax Code.

Gathering Evidence for Section 42 Tax Protests in Texas

For the most effective Section 42 protest, compile:

LURA or Extended Use Agreement. The recorded restriction agreement is the foundational document establishing the encumbrance. Provide a copy to the appraisal district and to the ARB.

Form 8609 and credit allocation records. These documents confirm the property’s LIHTC status and the applicable AMI percentages for restricted units.

Restricted rent schedule. The current schedule of maximum permitted rents for qualifying units, updated to reflect the current year’s AMI limits from HUD.

Actual rent roll. Showing current restricted rents charged for all units, distinguishing between restricted and any market-rate units if the property has a mixed-income structure.

Income approach using restricted NOI. An income analysis using actual restricted rents, actual vacancy, and actual operating expenses to produce actual NOI — then capitalized at a market cap rate appropriate for Section 42 properties in your market.

Comparable Section 42 property sales. Sales of LIHTC properties in Texas, where available, provide direct evidence of market value for restricted properties. These sales will show that Section 42 properties trade at significant discounts to equivalent market-rate multifamily.

Protest Strategy for Different Texas Markets

The magnitude of the Section 42 overassessment problem varies by market:

Major metros (Harris, Dallas, Travis, Bexar, Tarrant counties): In high-cost Texas markets where market rents significantly exceed AMI thresholds, the overassessment risk is greatest. The income restriction effect is largest in absolute dollars in these markets, and the appraisal district’s failure to apply restricted income methodology produces the largest overstatements.

Growing suburban counties (Collin, Fort Bend, Williamson, Denton): Rapidly appreciating rents in DFW and Austin suburban markets have widened the gap between AMI-restricted rents and market rents. Section 42 properties in these markets are increasingly subject to overassessment as market rents diverge from restrictions.

Secondary cities and rural counties: The income restriction effect is smaller in markets where market rents are closer to AMI thresholds, but it is never zero. Even in rural Texas, a Section 42 property that restricts rents at 60% AMI is not the same market value proposition as an unrestricted rental.

For county-specific guidance on filing and hearing procedures, see our pages for Harris County, Dallas County, and Tarrant County. For the complete Texas protest process, see our how-to-protest guide.

How We Help Section 42 Property Owners

LowerMyCommercialTax.com represents Section 42 property owners in Texas on contingency. We understand the specific legal framework under §23.012, the LURA encumbrance argument, and the income approach methodology appropriate for restricted properties. Contact us to schedule a free review of your LIHTC property’s 2026 assessment.

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About the Author

Mike VanVickle is the founder of LowerMyCommercialTax.com, helping Texas commercial property owners reduce their tax burden through professional protest representation. With deep expertise in Texas property tax law and appraisal district processes, Mike and his team have helped property owners across all 254 Texas counties achieve meaningful reductions on a contingency basis — no savings, no fee.

Sources & References

• Texas Comptroller of Public Accounts — Property Tax System Basics
• Texas Property Tax Code, Title 1, Subtitle D — Tax Code §41.41
• Texas Property Tax Code §23.012 — Low-Income Housing Tax Credit Properties
• Internal Revenue Code §42 — Low-Income Housing Credit
• U.S. Department of Housing and Urban Development — Area Median Income Limits
• Texas Taxpayers and Research Association — Property Tax Reports

This guide was last reviewed and updated on May 22, 2026. Tax rates, deadlines, and procedures are subject to change. Consult your county appraisal district for the most current information.