What if I sell my house?
While selling your home may be the furthest thing from your mind now, it's important to know how selling a house obtained with an Montana Housing First-Time Homebuyer Mortgage or an MCC tax credit may affect you in the future.
The new buyers may be able to assume your First-Time Homebuyer Mortgage or Mortgage Credit Certificate. Conventional loans, however, are not assumable. In addition, the price limits for existing homes apply for re-sales.
A federal law commonly known as "recapture tax" may affect borrowers who buy their homes using Mortgage Revenue Bonds and Mortgage Credit Certificates like the ones that we issue for first-time home buyers. While you may be concerned about the recapture tax, in reality, the odds are low that you will have to pay it.
The following events must all occur to trigger the tax:
- The home is sold within the first nine years of the closing date; AND
- The homeowner realizes a gain on the sale of the home as defined by the IRS; AND
- The homeowner’s family income exceeds the maximum income limit at the time of purchase, compounded at 5% annually to the sale date.
In other words, to owe any recapture tax at all, you must sell your home within nine years, earn significantly more income than when you bought the home, and gain from the sale.
Recapture taxes are figured on a scale based on the number of years you have lived in the house, with sales in the fifth year being the most likely to require the tax. Even if you do have to pay, the tax guidelines are structured to help you:
The 5% increase in income that makes you a candidate for recapture is figured from the maximum income limit for the low-interest mortgage program at the time of purchase. For example, if you earned $40,000 per year when you purchased your home and the maximum income limit was $50,000, the 5% increase would be figured from $50,000, not $40,000. You would actually have to receive in excess of a 5% increase in salary each year to be considered for recapture.
Recapture tax may not exceed 50% of the gain you realize upon the sale of the home. Even if you sell your home in year five (when the tax liability is the highest), your income increases significantly, and you make $2,000 on the sale, the maximum you could owe is $1,000. And the gain is calculated after items such as the real estate agent, legal and closing fees have been deducted from the proceeds of the sale.
If your income exceeds the maximum income limit, but not by more than $5,000, only a percentage of the tax is due.
Regardless of whether a borrower owes a Recapture Tax upon the sale of his or her home, they must complete IRS Form 8828 and file it with their Federal Tax Return for the year the home is sold. IRS Form 8828 will assist borrowers in calculating the correct amount due, if any, to the IRS. An applicant should refer to their recapture tax disclosure notice when completing IRS Form 8828. For answers to specific questions about calculating potential tax liability, seek assistance from a professional tax advisor or the IRS. Toll free numbers for the IRS can be found at IRS.gov.