Initiated by the Internal Revenue Service, this provision applies to borrowers not only in Nevada, but throughout the country. In essence, recapture enables the government to recover a portion of the gain, if any, realized from the sale or transfer of a MRB-financed home.

As a new provision, recapture has generated concerns among lenders, real estate professionals, and prospective borrowers. Their perception is that recapture is confusing, complicated, and time consuming to calculate. In reality, it is none of the above, and a few straight answers to some of the most commonly asked questions will help dispel these concerns.

What exactly is recapture?

Basically, it is a tax that borrowers may have to pay on their federal income tax returns when they sell their NHD-financed homes. Recapture applies only to homes financed on or after January 1, 1991.

Why did the federal government institute this tax?

Owners of homes financed with MRBs receive the benefit of lower-than-market-rate interest loans, sometimes as much as several percentage points. Under certain conditions, recapture enables the government to recoup some of the subsidy that the borrower enjoyed as the result of obtaining a NHD single family mortgage loan.

What are the conditions where recapture does not apply?

First, the borrower must dispose of all or part of his interest in his residence within nine years from the closing date of his mortgage loan. Secondly, the borrower's income must exceed the federal income limit in the year of the sale of his residence. Third, the borrower must realize a profit or net gain on the sale of the home.

How much recapture will a homeowner have to pay?

The most recapture tax a homeowner may have to pay (Maximum Recapture) will never be more than 6.25% times the original principal amount of the mortgage loan. For example, on a mortgage loan of $50,000, the Maximum Recapture would not exceed $3,125 ($50,000 x 6.25% = $3,125).

Does a homeowner always have to pay the Maximum Recapture?

Fortunately, no. There are three factors which may adjust or reduce the amount of recapture due: the amount of the gain on the sale; the date of the sale; and the homeowner's income and family size in the year that the sale is completed.

Will recapture completely eliminate a homeowner's profit from the sale of the house?

Under the gain-on-sale adjustment, the recapture amount will never exceed 50% of the profit from the sale. If the net gain on the sale were $4,200, for example, the Maximum Recapture would be $2,100 ($4,200 x 50% = $2,100).

Remember: If there is no gain on the sale, no recapture tax is due.

Are there advantages to selling a NHD-financed home later in the nine-year recapture period?

Under the date-of-sale adjustment, yes. The recapture amount increases during the first five years of ownership with full recapture (100%) occurring if a borrower sells a home during the fifth year of ownership. The amount then decreases each year by 20% through year nine. If the sale occurs in or after the tenth year, no recapture tax is required.

Does income and family size affect the amount of recapture?

When calculating the actual recapture amount, however; two factors apply: the borrower's annual income in the year of the sale of the home; and the incomes limits set by the federal government for participants in a MRB program. Recapture applies only when the borrower's income is greater than the federal income limit in the year of the sale.

How many borrowers in NHD's Single Family Loan Program will be affected by the recapture provision?

With an average annual income of approximately $39,400 when they enter the Single Family Loan Program, most NHD borrowers will probably not be affected by recapture at the time they sell their homes. As an example, in Clark County, for recapture purposes, the federal income limit for a one- or two-person family is $49,800 ($57,250 for a three- or more-person family) and in Washoe County, $53,100 and $61,065 respectively. These are base-year federal income limits and are increased by 5% compounded annually. This wide margin between the average NHD borrower's income and the higher annual escalating federal limits makes it unlikely that many borrowers will have to pay any recapture tax.

On assumptions, does recapture affect new buyers assuming the loan from the previous owner?

If the loan being assumed is a NHD loan closed after December 31, 1990, recapture also applies from the first through the ninth year of ownership for the new loan participant. The time of sale, net gain on sale, and income/family size adjustments are available to assumptors, as well.

How will the IRS track the amount of recapture tax due upon the sale of a NHD-financed home?

Recapture will be tracked by the IRS through the use of homeowners' social security numbers as reported on 1099s forms issued by the title companies in the year of the sale. If required to pay a recapture amount, each homeowner must report it on his or her federal income tax return. It would be a good idea to consult a tax accountant or financial advisor prior to preparing a return.

Is recapture due if the borrower dies before the tenth year of home ownership?

If the deceased borrower is the sole owner of the home, no recapture will be due. If, however; the home is owned jointly with a spouse or other person, he or she may be responsible for paying the recapture tax if the home is sold during the first nine years of ownership.

In the case of a divorce, who is responsible for recapture?

Whoever receives the home in the divorce settlement pays the recapture, if any.

What if a NHD-financed home is destroyed as the result of a fire, flood, or other natural disaster?

If a home subject to recapture is destroyed, and the borrower rebuilds on the same site within two years after the year in which he or she received the insurance proceeds - no recapture is due.