Montana Housing is a State Housing Finance Agency that sells tax-exempt bonds under the federal Mortgage Revenue Bond Program (MRB), creating special loans for eligible home buyers. Bond investors receive tax-free interest income. Home buyer benefits vary, but can include lower mortgage rates and help with closing costs; or a federal income tax credit under a separate program called a Mortgage Credit Certificate (MCC). The Internal Revenue Service defines these benefits as a "federal subsidy benefit‟ or "public benefit‟. Recapture tax provisions were written into tax law by IRS and Congress to “recapture” a portion of this benefit under limited circumstances. The operative word is portion. Recapture tax is not intended to cancel program benefits.
Recapture provisions are ONLY triggered if ALL three occur:
- Sell the home within 9 years AND
- See a significant gain on the sale of the home AND
- Have a substantial increase in household income to above the "Adjusted Qualifying Income"
Limits on Recapture Tax:
The maximum recapture tax is the LESSER OF 50% of the gain on the home; OR 6.25% of the original loan amount. Also, the maximum tax is calculated on a bell curve over the 9-year period, with early and later years being lower. "Year 5" is the highest possible year.
People most likely to pay this tax:
- Employed with high income growth potential
- Close to the income limit at the time home is purchased
- "Empty nester" at the time of sale
- Live in a high inflation environment
- Sell after 9 years.....NO recapture tax
- Sell with no gain......NO recapture tax
- Income within Federal Limits......NO recapture tax
Disclaimer: This is a brief overview of complex IRS guidelines. Homeowners are always encouraged to seek advice from their tax professional specific to their situation.