People Talking Hilltop Securities

Fear of paying Recapture Tax should not cause a homebuyer to forego use of the MCC program.

The MCC programs provide deserving families thousands of dollars of savings on their home loans through a tax credit. In addition, homebuyers receive all of the benefits that come with owning a home. In fact, many homebuyers may not have originally been able to qualify for their home loan without these programs.

"Recapture" is a potential repayment of a portion of the savings that the program has provided the homebuyer through the tax credit. This requirement comes from the federal government. Initially, this may cause some concerns particularly when making a decision whether or not to use this program. Before making a decision the homebuyer should be familiar with some of the basics.

First of all, there is only a potential that a homebuyer may ever have to pay any recapture at all. The federal law is intended only to recapture the interest savings from homebuyers that are no longer in a position where they need the savings. Since the law has been in effect, it has been determined that the overwhelming majority of homebuyers will never pay recapture.
   
Payment of any recapture will only be required if all three of the following events occur:
   
Home is sold during the first nine years of ownership; and
Homebuyer has a gain (net profit) on the sale of the home; and
Homebuyer experience substantial increases in their income

In other words, to owe any recapture tax at all, the homebuyer must sell their home within nine years, earn significantly more income than when they bought the home, and gain from the sale. All three of these criteria must be met. For the few home buyers who have to pay it, the recapture tax will never exceed one-half of the gain on the sale of the home, or 6.25% of the original mortgage, whichever is less.

It is complicated to calculate the amount of recapture that a homebuyer would actually be subject to. The actual amount is computed by using a formula taking into consideration the following:

The date of sale or transfer of the home;
The homebuyers income in the year of the sale or transfer; and
The amount of gain from the sale or transfer.

Recapture Tidbits

  • The 5% increase in income that makes a homebuyer a candidate for recapture is figured from the maximum income limit for the MCC program at the time of purchase. For example, if a homebuyer earned $40,000 per year when they purchased their home and the maximum income limit was $50,000, the 5% increase would be figured from $50,000, not $40,000. They 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), the homebuyers income increases significantly, and they 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.
  • The recapture provision is administered by the Internal Revenue Service (IRS). If any recapture tax is due, the homebuyer pays it after selling their home as part of your federal income tax liability for the year in which the home is sold.

    In order to illustrate how the recapture provision may affect a homebuyer, some examples are demonstrated below.

Common Scenario

Robert and Sharon purchase a home in Dallas for $74,000 using an MCC. At the time they purchase the home their annual income is $30,000.
   
Seven years later, they have one child and they decide to sell their home to move into a larger home. They sell their home for $100,000 and a net gain of 27%. In addition, their income has increased to $50,000 annually (an increase of 67%).

Wow! These borrowers have had some positive changes in their lives over the past seven years; however, they are not subject to any recapture at all.
   
As you can see, families may realize significant financial changes in their lives, beginning with the MCC programs, and not be required to pay any Recapture Tax. Again, even if recapture does apply, it will not exceed one-half of the gain on the sale of the home, or 6.25% of the original mortgage, whichever is less.
   
You owe it to yourself to investigate the potential advantages of the MCC program.

For additional information refer to "Reality of Recapture" and "Recapture Tax Frequently Asked Questions".

For answers to specific questions about calculating potential tax liability, homebuyers should seek assistance from a professional tax advisor or the IRS. Toll free numbers for the IRS are 877-829-5500 or 800-820-1040.


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