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Recapture Tax

 

Montana Board of Housing (MBOH) 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

  • Recognize a significant gain on the sale of the home; AND

  • Have a substantial increase in 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
     

Example:

  • $40,000     Household income when purchased

  • $90,000     Household income when sold

  • $40,000     Net profit on sale

  • $4,200       Recapture tax paid
     

Summary:

  • 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.


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HOUSING DIVISION | MONTANA DEPARTMENT OF COMMERCE
301 S. PARK AVE, STE 240 | PO BOX 200528 | HELENA, MT 59620-0528 | P: (406) 841-2840 | F: (406) 841-2841 | TDD: (406) 841-2702 | TOLL FREE: (800) 761-6264