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What If I Sell My House?

While selling your home may be the furthest thing from your mind now, it’s important to know how selling a house obtained with an N.C. Housing Finance Agency FirstHome Mortgage or an MCC tax credit may affect you in the future.

Assumption

The new buyers may be able to assume your FirstHome Mortgage or Mortgage Credit Certificate. Conventional loans, however, are not assumable. In addition, the price limits for existing homes apply for re-sales.

Federal recapture

A federal law commonly known as “recapture tax” may affect borrowers who buy their homes using Mortgage Revenue Bonds and Mortgage Credit Certificates like the ones that we issue for first-time home buyers. While you may be concerned about the recapture tax, in reality, the odds are low that you will have to pay it.

No recapture is due

• if you sell your home after nine years,
• if your household income does not rise significantly over the life of your loan (generally more than 5% per year), or
• if you sell your home within nine years but there is no gain.

In other words, to owe any recapture tax at all, you must sell your home within nine years, earn significantly more income than when you bought the home, and gain from the sale. All three of these criteria must be met.

For the few home buyers who have to pay it, the recapture tax will never exceed one-half of the gain on the sale of the home, or 6.25% of the original mortgage, whichever is less. If you are required to pay it, you may be eligible for reimbursement from the Agency. For more detailed information, please review form 107-MRB & MCC Recapture Tax Closing Packet.

Recapture taxes are figured on a scale based on the number of years you have lived in the house, with sales in the fifth year being the most likely to require the tax.

Even if you do have to pay, the tax guidelines are structured to help you:

• The 5% increase in income that makes you a candidate for recapture is figured from the maximum income limit for the low-interest mortgage program at the time of purchase. For example, if you earned $40,000 per year when you purchased your home and the maximum income limit was $50,000, the 5% increase would be figured from $50,000, not $40,000. You would actually have to receive in excess of a 5% increase in salary each year to be considered for recapture.
  
  
• Recapture tax may not exceed 50% of the gain you realize upon the sale of the home. Even if you sell your home in year five (when the tax liability is the highest), your income increases significantly, and you make $2,000 on the sale, the maximum you could owe is $1,000. And the gain is calculated after items such as the real estate agent, legal and closing fees have been deducted from the proceeds of the sale.
  
  
• If your income exceeds the maximum income limit, but not by more than $5,000, only a percentage of the tax is due.

The recapture provision is administered by the Internal Revenue Service (IRS). If any recapture tax is due, you pay it after selling your home as part of your federal income tax liability for the year in which the home is sold. After closing on the purchase of your home, you will receive an individualized “Recapture Settlement Disclosure” showing the maximum recapture tax, if any, that could be due in the event you sell in the first nine years.

For most people, the financial benefits of the North Carolina Housing Finance Agency’s FirstHome Mortgage and of home ownership—deductions for mortgage interest and taxes—far outweigh the possibility of having to repay part of the assistance that they receive.