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| Reality of Recapture |
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Because MSHDA loans are funded through the sale of tax-exempt bonds, which benefits borrowers by lowering the loan interest rate, some borrowers are required to repay the government a portion of their gain upon the sale of their home. If recapture tax is due, the borrower pays it to the Internal Revenue Service (IRS).
In Reality: Most borrowers will not have to pay any recapture tax. For others, the amount will be minimal and never exceed one-half of the gain on the sale of the home, or 6.25 percent of the original mortgage, whichever is less.
In order for recapture tax to be due, ALL of the following events must occur: |
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- Household income increases significantly over the life of the loan (generally more than five percent per year).
- The home is sold within nine years of closing on the loan.
- There is a gain on the sale of the home.
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MSHDA recognized that this may be a concern for individuals, so the Recapture Tax Reimbursement Program was created. In the event a borrower is required to pay a recapture tax, MSHDA will reimburse borrowers for any recapture tax paid by the borrower to the IRS. To request reimbursement, homeowners simply provide MSHDA with an IRS form 8828 and a signed copy of their IRS 1040 form. |
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| Recapture taxes are figured on a scale based on the number of years the homebuyer has lived in the house, with the fifth year being the worst time to sell. |
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| For example, the average MSHDA borrower had an annual household income of $40,000 and lived in a two person household. Assuming an average borrower purchased a home using a MSHDA mortgage in 2006 and then sold or otherwise disposed of the home within the first year of purchase, his or her household income would have to be over $62,100 (an increase of over 55%) at the time of sale for recapture tax to be considered. If this same borrower sold or otherwise disposed of the home four years after purchase, household income would have to be $71,889 (an increase of over 79 percent) before recapture tax becomes a possibility. Furthermore, if the borrower's household size increases to three or more persons by the time the property is sold or otherwise disposed of, the household's income would have to increase to over $71,415 for sales in year one and $82,672 for sales in year four. |
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| Based on average borrower income statistics and other conditions, the majority of MSHDA borrowers do not have to pay recapture tax. |
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| For more information about federal recapture tax (including income guidelines), please visit www.irs.gov. |
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