Section 42 of the Internal Revenue Code authorizes an income tax credit for investment in low-income housing. There are two important differences between section 42 and section 29 credits:

An investor in low-income housing can utilize Section 42 tax credits to reduce taxes on income from passive activities only, whereas Section 29 credits can be applied to all types of income, active, passive, earned, dividend, unearned, pension withdraws - all income period.

If an investor in low-income housing wants to sell his or her interest in the property before the holding period of 15 years (state law may be longer - up to 30 years), he must return to the IRS the value of all tax credits taken in prior years. Although these lost credits are transferable to the new owner, the passive activity and AMT limitations make the transfer inefficient.