DEFINITION of Federal Subsidy Recapture
A federal subsidy recapture is the repayment of all or part of a federal mortgage subsidy if the home is sold or otherwise disposed of within nine years of receiving a federally-subsidized loan. If a home is financed using a federally-subsidized program, all or part of the benefit received from the program may need to be repaid (recaptured) by increasing the federal income tax for the year of the sale.
BREAKING DOWN Federal Subsidy Recapture
A federal mortgage subsidy occurs when a homebuyer receives one or more of the following:
- A mortgage loan that had a lower interest rate than was usually charged because it was funded from a tax-exempt qualified mortgage bond (QMB) issue
- A mortgage credit certificate (MCC) with the mortgage loan that can be used to reduce the homebuyer's federal income taxes
- An assumed seller's obligation on a QMB-funded loan, provided the homebuyer is qualified to obtain a loan from the proceeds of a QMB
- The seller's MCC that is transferred with the approval of the issuer, and the homebuyer meets the eligibility requirements for the MCC
Factors That Affect a Federal Subsidy Recapture
If the home is sold after the nine year period, the federal subsidy is exempt from recapture. Likewise if the home is sold at no gain, there is no recapture of the subsidy. Furthermore, if the homeowner’s income falls within limits set by federal guidelines, they are also exempt from recapture. If the home was given away within the nine-year period, then the possible tax through recapture must be calculated as if the home was sold at the fair market price at the time of sale.
In cases of divorce, if the home is transferred from one spouse to the other, then the subsidy recapture does not go into effect. However, if the now ex-spouse sells the home within the nine years period, they could be subject to the recapture tax. When calculating the tax, those who receive a home, or interest in one, through divorce will have an adjusted basis that will generally be the same as their former spouses.
There is no recapture if the home is transferred due to the death of the homeowner.
The federal subsidy recaptured is calculated by assessing the sale price of the home, the amount of interest the homeowner has in the residence, and other factors such as how much time passed between the close of the mortgage, whether the federally subsidized loan was paid off in full within four years of the closing, and the later sale of the house.