MCC Recapture Tax (County Program)

 

When the MCC program was first introduced more than 30 years ago, there was no Recapture Tax associated with it.  But the program was extremely popular and quickly ran out of funding.  They cancelled the program.  Many years later at the urging of housing and First Time Homebuyer advocates they reintroduced the MCC program with a plan that they hoped would allow the program to continue indefinitely.  The new program included the Recapture Tax which allowed the program to get funds back from certain homeowners in certain cases.  Generally speaking, if the buyer owns the house for 9 years or more they never have to pay any money back.  If however they sell prior to 9 years, and the buyers income has risen to a “high” level, the program MAY ask the buyer to give something back to help the next buyer trying to get in.  Seems fair right?  And it has worked.  For the most part the program has funding for about 4 to 8 months of the year.

You will be subject to a special recapture tax for the tax year in which you sell or transfer your home ONLY if you meet all four of the following conditions:

1. You sell or transfer the home on or before (9 years from the date of Mortgage Closing listed above), and
2. You sell or transfer the home at a gain (determined by the IRS form on gain from sale of a single-family residence, whether or not you decide to rollover the gain), and
3. The Home is not:
   1. transferred as a result of death,
   2. transferred to a former spouse as a result of divorce (in which case the former spouse is treated as if he or she has been the owner from the date of Mortgage Closing), or
   3. rebuilt from casualty insurance proceeds within two years after its destruction; and
4. Your taxable household income (adjusted gross income) for the year in which you sell your home exceeds the following Income Threshold.

The Recapture Tax Notice #2 has the complete details of all 4 criteria (AND YOU SHOULD READ IT), but it has outdated income guidelines as its examples. We have updated the income examples for the year 2013 based on the real income limits and you can see them below.

It is important to understand the “Income Threshold”.  The threshold is derived by looking at the maximum amount you are allowed to make and still qualify for the program in any specific year.  For example, looking at the chart below we see that if you were a single woman this year with no kids and purchase in a “Normal Area” you threshold would be 75,900.  The Threshold is derived AT THE TIME YOU BUY THE HOUSE, not at the time that you sell it so your threshold would be 75,900 for the next 9 years (remember after 9 years there is no possibility of Recapture tax anyway).  Thus, Threshold is a snap shot in time that is used to determine the maximum threshold income you can have for the year that you sell.

	Family of 1 or 2		Family of 3 + People
2013 MCC Allowable Income & Tax Recapture	Normal	Targeted	Normal	Targeted
2013 guidelines allow this as the maximum income to qualify for a new MCC	75,900	91,080	87,285	106,260
If you buy in 2013 & sell before 9 years you may be subject to Recapture Tax
Selling house less than 1 year after Mortgage Closing?  This is your new Threshold	79,695	95,634	91,649	111,573
More than 1 but less than 2 years after Mortgage Closing:  This is your new Threshold	83,679	100,415	96,231	117,151
More than 2 but less than 3 years after Mortgage Closing:  This is your new Threshold	87,863	105,436	101,043	123,009
More than 3 but less than 4 years after Mortgage Closing:  This is your new Threshold	92,256	110,708	106,095	129,159
More than 4 but less than 5 years after Mortgage Closing:  This is your new Threshold	96,868	116,243	111,400	135,617
More than 5 but less than 6 years after Mortgage Closing:  This is your new Threshold	101,712	122,055	116,970	142,398
More than 6  but less than 7 years after Mortgage Closing:  This is your new Threshold	106,798	128,158	122,818	149,518
More than 7 but less than 8 years after Mortgage Closing:  This is your new Threshold	112,137	134,566	128,959	156,994
More than 8 but less than 9 years after Mortgage Closing:  This is your new Threshold	117,744	141,294	135,407	164,844
9+ years: The buyer does not need to pay the MCC back for any reason.

Example:  A family of 4 buys a house in 2013 (normal area).  At that time they had an income of 46,000 but a threshold of 87,285.  In 2018 they decide to sell it (it has been more than 5 years since their mortgage funded).  As long as their current income (for the year 2018) does not exceed 116,970 (see it  under a family of 3+   normal area – (3rd column)), then the do not have any chance of paying the Recapture Tax.  All of this information is given to the buyer upon application fro the MCC.

I don’t believe any of my clients have  had to pay a Recapture Tax.  But here are a couple of thoughts.

• If you are in college and making 40,000 a year but expect to graduate this year and start a job as a nuclear scientist making 500,000 a year…you might have to give some back to the next guy.  But remember, only if you sold in the first 9 years and met the other 3 conditions to.
• If you are single and making 60,000 a year.  It is getting pretty serious between you and your boyfriend who makes 120,000 a year…Well then you might have to give something back if you sell in the first nine years, you and your boyfriend have married, and together you meet the other three criteria.
• You are currently making 75,000 a year (you just barely qualify for MCC), and you are a superstar at your work.  While you probably will not get 5% raises every year, you probably will get a promotion to regional manager making 150,000 a year.  Well again, you might have to give something back.
• You can always avoid paying the tax back at all by just not selling the house until 9 years passes.  MCC is one of the only programs that does not require that give the money back if you move out.  If for some reason you need to change residences, you can rent this house out and just not claim the MCC credit on your taxes for the years that you have it rented!
• And finally, think about this.  So what if you have to give a little back.  It is unlikely you could ever have to pay back more than you got (I will give some examples below), so the worst that could happen is that you got to buy and live in a nicer house, you probably gained more equity than you would have (because you could afford a more expensive home), and in the end the world treated you good.

By the way, a lot of people ask, well if I did owe money back, how much would I owe.  The rules say

• The Tax, or
• 1/2 your gain from the sale, whichever is LESS

The 1/2 your gain is used by lenders who don’t want to do the extra work to scare off buyers.  They will say, MCC will take half your equity.  You must read the statement carefully to understand it is actually a way of protecting you.  It was actually put in there to protect the buyer against owing Taxes if they were not going to make a profit on the sale of the house.

• Example 1:  You buy a house for 300,000 and sell it for 330,000.  Your costs in the sale of the house were 28,000, thus your net profit was 2,000.  You would owe half of 2,000 (1,000) or the tax which ever was less.
• Example 2:  You bought the house at 300,000 and sold it at a million,  Your costs to sell were 100,000.  Your net profit was 600,000.  You owe half of 600.000 (300,000) or the tax, which ever is less.  I guess this really makes it important to know what the Tax is then huh?

The chart below shows that how much the Tax is, depends on when you sell the house.  As you can see, the worst year to sell it would be 4 years after you bought it.  We have put a more realistic 300,000 Purchase price as our example and you can see that if you sold in year 4 and you met all four criteria and your original Purchase Price was 300,000, you would owe how much???  If you said 18,750 you have a 50% chance of being right.  The answer is, you owe 1/2 your equity or the Tax, whichever is less.

• In the first example (just above), the homeowner has a net profit of 2,000.  The Half Your Net Profit or the Tax clause protected him from owing the full 18,750, he only owes 1,000 (half his net profit)
• In the second example above, the homeowner has a net profit of 600,000.  In this case the lower amount is the “Tax” of 18,750.

Selling your house in 2013 and owned in it less than 9 years?	Original Purchase Price		$300,000 Example
Selling your house in less than 1 year after Mortgage Closing?	1.25% of the original Purchase Price			$3,750
1 or more years, but less than 2 years after Mortgage Closing:	2.50% of the original Purchase Price			$7,500
2 or more years, but less than 3 years after Mortgage Closing:	3.75% of the original Purchase Price			$11,250
3 or more years, but less than 4 years after Mortgage Closing:	5.00% of the original Purchase Price			$15,000
4 or more years, but less than 5 years after Mortgage Closing:	6.25% of the original Purchase Price			$18,750
5 or more years, but less than 6 years after Mortgage Closing:	5.00% of the original Purchase Price			$15,000
6 or more years, but less than 7 years after Mortgage Closing:	3.75% of the original Purchase Price			$11,250
7 or more years, but less than 8 years after Mortgage Closing:	2.50% of the original Purchase Price			$7,500
8 or more years, but less than 9 years after Mortgage Closing:	1.25% of the original Purchase Price			$3,750
9+ years: The buyer does not need to pay the MCC back for any reason.

 

However, there are some ways that they help you reduce the amount of Recapture Tax you would need to pay.  One way is the 5,000 dollar rule.  If your income exceeds your allowable threshold by 5,000 or less, then they will reduce the amount that you owe.   The calculation they provide is to take the amount you are over your threshold divided by 5,000 = the percentage of the tax you would have owed.  Example:  You sold in the 4th year and your threshold is 96,868 (2 tables above), but your income is 100,000.  100,000 – 96,868 =3,132 that you are over your allowable threshold.  3,132 divided by 5,000 = .6264.  This completes or first part of the calculation (remember .6264).  Now using the table just above we see that if we sold in 4 years we would ow 6.25% of the original loan amount.  In our example we said the loan amount was 300,000 and this meant that we would have owed 18,750 in Recapture tax.  But because our income exceeded the threshold by less than 5,000 (3,132 for us), we only need to pay .6264% of the 18,750.  So 18,750 x .6264 = 11,745.  Thus we only owe 11,745.  Please note that this is only an example and full instructions can be found in the document Recapture Tax Notice #2

So you can see that for most people, it is unlikely that they will every have to pay anything back.  For those that do, they will have to pay the lessor of  the “Tax” or 1/2 their gain (witch is a safety valve to insure that they are not forced to pay the :”tax” if there is no profit).  In the example above, on a 300,000 house we see that in the very worst case scenario they would have to pay 18,750 (if they sold in the 4th year), but again, how likely is it that you would meet all 4 criteria to make you pay the Tax AND need to sell in that specific 4th year and not be able to put the sale off for a year or two to reduce the amount that you would ow?  But lets just say that the worst of all things happened and you did.  So did you really loose 18,750 dollars?  The answer of course is , no.  Using the True Mortgage Calculator we see that on a 300,000 purchase price with an interest rate of 4.5% the MCC program would give you approximately 220 monthly benefit.  Let’s say that it was 52 months at the time that you sold (a little over 4 years).  220 monthly MCC benefit x 52 months is 11,440 in MCC benefit that you got from MCC over those 52 months.

So in reality,  not only is it very unlikely that you will ever have to pay anything back.  Even if you do, they have

• included the “or half your net profit, whichever is less” clause to insure that you never have to pay back money if there is not at least some profit in the sale of the house.
• have insured that after you take into account the amount of monthly benefit you received, the amount they ask you for is very small.
• The buyer gets to keep the equity on the house they bought.

In the worst case example above, the homeowner met all 4 criteria and owed the Tax.  They sold their house in the worst possible year (4th) and owed 18,750 (in this case they did not qualify for the 5,000 rule).   But they also had received 11,440 so there net loss was only 7,310.  And if they were able to utilize the 5,000 rule, then they lost nothing!

As you trying to determine if the MCC is for you, keep in mind all of these things.

• Ask yourself how likely you are to move in the first 9 years.  (remember you can always rent it out until a couple of years pass if needed).
• If likely, how many years?
• Look at the income chart at the top and ask you self how likely you will be to have an income over the allowed threshold for the year you will sell.
• Look at the Recapture Tax chart to see what percentage you will owe if you sell in that year.  Multiply the purchase price times the Tax percentage rate to see the amount of Tax you might have to repay
• Use the True Mortgage Calculator to calculate the monthly benefit you will receive from MCC.  Multiply that by the number of months you will be in the house before your anticipated sale date.
• If the MCC Benefit is greater than the tax, the program is benefiting you and you should use it.  If the Tax is greater than the MCC benefit, then you will owe the difference IF you sell in that year.  In this case ask these additional questions
  • Will the value of your house go up by more than twice the Tax?  Remember the “or 1/2 your gain whichever is less” clause.  If you anticipate that the Tax will be 5,000 then for you to owe all 5,000 your house would need to go up by approximately 28,000.  Here is why.  In our example we bought a 300,000  house.  Now let’s say we sold it for 328,000.  Our costs to sell the house were about 18,000 (7.5%) leaving 20,000 gain on the house.  If in fact we do owe the tax, the government takes get the Tax (5,000 in this example) or 1/2 the net profit also 5,000 in this example (half of the 10,000 net profit).  In this example, if the buyer did not expect the value of the home to rise more than 28,000 before he sold, he would probably use the “or half your equity, whichever is less” clause and owe less.  Also one more important rule, You can take the cost of any repairs and improvements off of the sales price.  So in this example, if he sold the house for 328,000 and had made 15,000 in improvements, then his gain would drop to -5,000.  Half of nothing is nothing, therefore they would owe no Recapture Tax.
  • Can you afford to buy the house you want without the MCC.
    • If no, use the MCC and pay them the money if you end up owing it.
    • If yes, Are you VERY likely to sell in that year?
      • If so and you will owe a lot (more than let’s say 5,000), perhaps this is not the program for you.
      • If So and you will likely owe very little, it is probably a good bet, you should go with the program.
      • If not (it is not likely you will sell), it is probably in your best interest to go for the program.

We have said it many time…You should read the Recapture Tax Notice #2  or call us and we can go over it with you.

Don’t want to do the math?  Give us a call, we specialize in helping First Time Home Buyers understand their options and liabilities.

We are not tax advisers and assume no liability for any of the information on this page.  This is our understanding of how the programs worked at the time this page was written.  You should not rely solely on this page for information as it gives a limited overview of a more complex program.  You should talk with us for a greater understanding,  and consult your tax adviser.