What Is a Federal Subsidy Recapture?

The term federal subsidy recapture refers to 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 recaptured or repaid by increasing the federal income tax for the year of the sale.

Key Takeaways

  • A federal subsidy recapture is the repayment of a mortgage subsidy if the home is disposed of within nine years of receiving a federally subsidized loan.
  • Federal mortgage subsidies occur when a homebuyer receives a lower interest rate or a mortgage credit certificate.
  • The recapture is calculated by assessing the sale price of the home, the amount of interest or equity the homeowner has in the residence, and other factors.

Understanding Federal Subsidy Recaptures

Purchasing a home is a dream for many people but it can be very daunting because of how much a person needs to invest. That's why there are programs in place that offer mortgage subsidies. These are offered at various levels, including federally, to help make homeownership more affordable and accessible—especially for people with low incomes. Mortgage subsidy programs usually involve more lenient underwriting requirements and are normally only available to first-time homebuyers.

Federal mortgage subsidies occur when a homebuyer receives one or more of the following:

  • A mortgage loan with a lower interest rate 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

Homeowners must abide by the terms and conditions of all mortgage subsidy programs in order to retain the benefits. So if a borrower sells or disposes of their home after a certain period of time, all subsidies provided by the federal program(s) must be repaid. In most cases, the period of time is nine years. This is known as a federal subsidy recapture.

The federal subsidy that is recaptured is calculated by assessing the sale price of the home, the amount of interest or equity 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. Recapture or repayment may also come in the form of higher taxes when the home is sold.

Special Considerations

There are some exemptions that apply to federal subsidy recaptures. For instance, there is no recapture necessary if the home is transferred due to the death of the homeowner.

A recapture of federal subsidies isn't required when a homeowner dies, if the home is transferred as a result of a divorce, or if the home is sold after nine years.

Likewise, if the home is transferred from one spouse to the other during a divorce, the subsidy recapture does not go into effect. However, if the now ex-spouse sells the home within the nine-year period, they may be subject to a recapture tax. When calculating the tax, those who receive a home—or an interest in one—through a divorce will have an adjusted basis that will generally be the same as their former spouses.

If the home is sold after the nine-year period, the federal subsidy is exempt from recapture. The same principle applies if the home is sold at no gain. 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.