recapture tax brochureindd

Document Sample
recapture tax brochureindd Powered By Docstoc
					    Q. In the case of a divorce, who is
       responsible for recapture?                      Disclosure Statement:
                                                       Florida Housing Finance Corporation is
    A. Whoever receives the home in the                not responsible for calculating recapture
       divorce settlement pays the recapture, if       tax. The information provided is strictly
                                                       for informational purposes and should
    Q. Will recapture eliminate the                    not replace the advice of a tax consul-
       borrower’s gain from the sale of                tant or the IRS. Please contact either of
       the home?                                       these sources with any questions.

    A. No. The recapture tax can never exceed
       50 percent of the gain.
                                                   About Florida Housing
Common Scenario                                    Florida Housing administers a number of rental
John and Kimberly purchased a home in              housing and homeownership programs that help
Palmetto for $74,000 using Florida Housing’s       low-income Floridians obtain safe, decent affordable
First Time Homebuyer Program. At the time          housing that might otherwise be unavailable to them.
they purchased the home, their annual income       Our rental housing programs include the Multifamily
was $30,000.                                       Mortgage Revenue Bond, Low Income Housing
                                                   Tax Credit, State Apartment Incentive Loan, Elderly
Seven years later, they have one child and they    Housing Community Loan, Florida Affordable Housing
decide to sell their home to move into a larger    Guarantee and Home Investment Partnerships
home. They sell their home for $100,000, a         programs.
net gain of 27%. In addition, their income has
                                                   Homeownership programs include the First
increased to $50,000 annually. They aren’t
                                                   Time Homebuyer Program, the Homeownership
subject to any recapture taxes, because they
                                                   Loan Program and down payment assistance
didn’t sustain a substantial increase in income.
                                                   programs such as the Homeownership Assistance
                                                   Program, HOME Down Payment Assistance and
Uncommon Scenario                                  Homeownership Assistance for Moderate Income. In
Mark and Teresa purchased a home in Miami          addition, Florida Housing offers the Mortgage Credit
for $55,000 using Florida Housing’s First          Certificate program. We also administer combined
Time Homebuyer Program. At the time they           homeownership and rental housing programs,
purchased the home, their annual income was        including the Predevelopment Loan Program and the
$25,000.                                           State Housing Initiatives Partnership program.

Six years later, they decide to sell their home
(one of the worst years according to the
recapture formula). They sell the home for                                                                Homeownership
$85,000 and their income has increased
to $50,000 annually. They realized a gain
of $25,000 on the sale of their home and
their income has increased by 100%. As a
                                                                                                          Recapture Tax
                                                                                                          G •u •i •d •e
result, these borrowers would have to pay
approximately $2,500 to repay the amount                     227 N. Bronough Street • Suite 5000
of interest they saved due to the increase in                       Tallahassee, FL 32301
income and gain realized from the sale of the                     Telephone 850.488.4197
                                                                      Fax 850.488.9809

                                                                     REVISED 01/19/05
The Internal Revenue Service (IRS) Recapture            to pay recapture tax, it would be due       Q. How do you calculate the
provision became a federal law on January               when federal income tax for the year in        “Adjusted Qualifying Income?”
1, 1991. Commonly known as “recapture,”                 which the home is sold is filed.
it applies to borrowers who purchase their                                                          A. First, determine the borrower’s
homes using financing derived from tax-exempt           There are certain expenses of a home           household size at the time the home
mortgage revenue bonds (MRBs) such as                   sale that the IRS allows to be deducted        is sold or transferred. Next, select the
those issued by the Florida Housing Finance             from the gross profit such as real estate      maximum income limit that would have
Corporation (Florida Housing). Initiated by the         commissions, state tax and home                applied to that household size at the
IRS, recapture allows the federal government            improvement expenses. The reduced              time the home was purchased. This
to recover lost tax revenues from the sale or           figure is the net profit.                      number, compounded by five percent
transfer of a MRB funded home.                                                                         per year from the date of purchase until
                                                   Q. How will a homeowner know                        the date the home is sold or transferred
Recapture tax requires some mortgagors to             if they are subject to pay any                   is the “Adjusted Qualifying Income.” If
repay the government a portion of their gain          recapture tax?                                   the borrower’s year-end income does
upon sale of the home if they financed their
                                                                                                       not exceed this amount, then there is no
home with a mortgage revenue bond (MRB)            A.   All three of the following events              recapture tax.
loan. If any recapture tax is due, the mortgagor        would have to occur in order for the
pays it to the IRS after selling the home. After        homeowner to be subject to recapture.       Q. How much recapture will a
the MRB loan closing, a “Welcome Letter/                First, there must be a profit or net           homeowner have to pay?
Recapture Notice” is mailed to the homeowner            gain made on the sale of the home. If
showing the maximum recapture tax which                 there is no net gain, then there is no      A. The maximum recapture tax a
could be due, if any. This information will be          recapture tax. Second, recapture only          homeowner may have to pay is 6.25
needed if you have to calculate the recapture           affects homes sold within nine years           percent of the loan’s original principal
tax. You should keep all mortgage information           of the date of purchase; homes sold            balance. For example, on a mortgage
about recapture as part of your tax records.            after year nine are not affected. Third,       loan of $85,000, the maximum
                                                        a borrower must have a substantial             recapture would not exceed $5,312.50
Recapture has generated concerns among                  increase in income (since the time of
lenders, real estate professionals and                                                                 ($85,000 x 6.25% = $5,312.50). This
                                                        the loan closing) that puts their current      percentage varies depending upon the
prospective borrowers. For most people,                 income above the “Adjusted Qualifying
the financial benefits of homeownership -                                                              number of years since the purchase of
                                                        Income Limit.”                                 the home. (Please see the following
deductions for mortgage interest and taxes as
well as the MRB program’s lower interest rates                                                         scale).
                                                   Q. What do you mean by a
and down payment assistance - far outweigh            substantial increase in income?
the risks of recapture.
                                                   A. Federal maximum income limits apply
If you have questions about the details that          to the purchase of your home. Certain
aren’t outlined in this brochure, you should          regulations automatically increase these
consult with a tax professional.                      maximums at the rate of five percent
                                                      per year for recapture tax purposes.
Commonly Asked                                        If at the time you purchase your
Questions and Answers                                 home your income is near the federal
                                                      maximum, annual income increases
    Q. What is the Federal Recapture                  would have to exceed five percent
       Tax?                                           per year before you would be subject
                                                      to any recapture tax. If your income
    A. It is a federal tax that some
                                                      was considerably below the federal
       homeowners with Florida Housing MRB
                                                      maximum at the time of purchase,
       loans may be required to pay from the
                                                      there is more leeway for an increase
       net profit they receive from the sale
                                                      in your income before you would be
       of their homes. If the homeowner has
                                                      subject to the recapture tax.

Shared By: