Monday, July 29, 2019

Cumulative Increases in Max Income Thresholds Make Excess Subsidy Recapture for OHCS Bond Homebuyers Highly Unlikely.

Mortgage revenue bond home buying programs, like the OHCS housing bond program (and the mortgage credit certificate in the City of Portland), include a IRS tax recapture provision that scares some potential homebuyers.

With the vast majority of homebuyers this fear is unwarranted because there is no recapture required unless homebuyer income increases substantially. The annual increase in income permitted is 5% but that is 5% increase of the maximum income limit. So, if a homebuyer starts with an income below the maximum, their permitted annual income increases will exceed 5%.

Year five is the maximum potential rate of recapture. Even if the homebuyer were at the exact maximum income when they got the loan their income could rise by 21.6% and still not trigger possible recapture in year 5. 

But, if their starting actual income was 10% below the maximum at the time they got the loan, their income could increase by 27.9% in year 5 and still not trigger the recapture and by 51.9% if their initial income was 20% below the maximum for the year in which they got the loan.  

For context, for OHCS loans made after June 14 this year, the year 5 limit for a 3 person or more household in Portland metro would be $143,362 (The current max income limit is $118,166).

I recently projected that a Portland metro veteran could qualify for a OHCS/VA $425,000 cash advantage zero down payment loan with an income of $88,830.  This means that family's household income would have had to increase by 61.7% ($54,892) in year 5 to trigger possible recapture. [$143,362-$88,830=$54,982).

The graph below shows my calculation of the cumulative percentage income increase in year 5 permitted before recapture would be required for homebuyers who initial income is at the max OR  at -1%, -5%, -10%, -15%,and -20% below the maximum at the time they took out the loan (after June 14 of this year). 

Table Provides Way to Estimate Permitted % Cumulative Income Increases by Year Before Recapture May Apply and is Applicable in Any Location, in Any Year.
The table below expands on the data shown on the graph, providing a tool to estimate how much income can grow without triggering possible recapture. 

In the left column is the percentage by which homebuyer income varies from the maximum income for the year in which the OHCS loan was made. (Max income limits vary by geography, by household size, and whether purchase is in targeted area or not). 

In the columns to the right the estimated cumulative percentage by which homebuyer income can increase and NOT trigger possible recapture is shown, by year that the home is sold.  

For example if max income was $100,000 at the time the OHCS buyer bought the home, and their actual income was 25% below the max ($75,000), and the buyer then sold the home in year 5, they would NOT be subject to possible recapture unless their income had increased by more than 62.1% ($46,551) to $121,551.
[62.1% x $75,000=$46,551+ $75,000= $121,551]. 

To summarize, unless bond financed homebuyers and MCC holders receive annual income increases in EXCESS of 5%, they are highly unlikely to be required to pay a recapture of subsidy.  

NOTE 1: In all cases the homebuyer is NOT subject to recapture IF there is no net gain when they sell the home and there is no recapture requirement after 9 years.  Recapture calculations only occur in the year of sale. 

NOTE 2: The table provides estimates for illustration ONLY. and could vary slightly from official calculations because of the use of different rounding conventions.  At loan closing the standard practice is to provide specific maximum income limits for the 9 years following the date of loan closing and these are the official limits to be used. 

More to Come on IRS Form 8828
IRS provides detailed instructions on the complicated recapture calculations to be made on IRS Form 8828, (This is one of the rare forms that TurboTax does not provide. More on those calculations at a later date).  

Originally created and posted on the Oregon Housing Blog.

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