NEVADA HOUSING DIVISON (NHD) MORTGAGE CREDIT CERTIFICATE (MCC) PROGRAM NOTICE OF POTENTIAL RECAPTURE

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1 NEVADA HOUSING DIVISON (NHD) MORTGAGE CREDIT CERTIFICATE (MCC) PROGRAM NOTICE OF POTENTIAL RECAPTURE MCC NUMBER The MCC Program provides qualified first-time homebuyers, veterans, active duty military and targeted area buyers federal income tax credit of 20% or 30% depending on their loan amount. The tax credit you are receiving is governed by federal law. The law mandates a Recapture of some of the benefit of the program. If Recapture Tax is owed, it s computed and paid to the IRS for the tax year in which the home is disposed of or sold. Therefore, if the home is disposed of (even through judicial means such as foreclosure) or sold during the next full nine years from closing AND there is a gain as a result of the sale of the property AND the qualifying income increases above the pre-determined limits in place at time of closing, the MCC benefit may be subject to Recapture. Please review the attachments to this Notice for more detail. Also, homebuyers are encouraged to consult a tax advisor or the Internal Revenue Service to determine if the program will assist them. The benefit is limited to the homebuyers tax liability. If there is no tax liability, there is no benefit to the MCC. See IRS Form 8828 for more detailed Recapture information. Following loan closing, you will be sent via mail a Final Recapture Notice that details the income limits and other information necessary to determine Recapture, If you have to pay. Please keep them with your other important mortgage documents. I/We have read and understand the Notice shown above and the attachments to this Notice. Date Signature of Homebuyer Signature of Homebuyer Attachments: About Recapture Tax ( 2 pages) Recapture Tax Reimbursement Policy (2 pages)

2 ABOUT RECAPTURE TAX When you receive a Mortgage Credit Certificate, you are receiving the benefit of a federal income tax credit. The Mortgage Credit Certificate program is governed by federal law. The law mandates a recapture of some of the benefit of the program if buyers meet all three of the following criteria -- the property ceases to be the principal residence in the first full nine years of ownership; there is a profit on the sale of the home AND the household income increases significantly. The limits in the first 12 months are the program limits. Then for the remaining 8 full years, the limits increase an additional 5% over the previous 12 months every 12 months thereafter. If Recapture Tax is owed, it s computed and paid to the IRS for the tax year in which the home is disposed of or sold. For the average buyer in these programs, it s unlikely that they ll be required to pay because their income is lower than that allowed. The most that you will ever be required to pay when you sell your home in the first full nine years is the lesser of half of the gain on the sale of the home or 6.25% of the highest principal amount of the mortgage loan during the life of the loan. (i.e. If the highest loan amount during the course of the loan was $50,000 and you sold in the months of ownership, then multiply $50,000 x.0625 and the highest you would pay would be $3,125.) This amount is considered to be the federally subsidized amount. When you sell your home is as important as the amount you receive for the sale of your home and the last factor considered is your income at the time you sell. The actual recapture tax, if any, can only be determined when you sell your home. Remember if you sell your home after nine years, there is no Recapture Tax due; if you don t receive a gain (net profit) on the sale of your home, there is no Recapture Tax due, or if your adjusted gross income does not increase significantly over the nine years, (usually that means more than 5% per year), there is no Recapture Tax due. To owe any Recapture Tax, you must sell your home within nine years, make a net profit on the sale of your home AND have a significant increase in income. All three criteria must be met in order for Recapture Tax to be due. You May Not Have to Pay Recapture Tax If your home is destroyed by fire, storm, flood or other casualty, there is generally no recapture tax if within two years you build or rehab for use as your principal residence on the site of the home financed with your original subsidized mortgage loan. You Are Not Subject to The Recapture Tax if you sell or give away or dispose of your home later than 9 full years after you close your mortgage loan your home is disposed of as a result of your death you transfer your home to your spouse or your former spouse as an agreement of your divorce and you have no gain or loss included in your income as a result of the transfer Refinancing If you refinance your home and stay in it for a full nine years, you won t pay Recapture Tax. Recapture kicks in when the property is disposed of, is sold, is affected by judicial action, or ceases to be your principal residence before the full nine years. Then you may owe Recapture Tax. If you refinance in the first full four years and the property ceases to be your principal residence before the full nine years, there is a special calculation worksheet that must be used if you must pay Recapture Tax. Form 8828 and Instructions for Form 8828 contain more detailed information.

3 INFORMATION YOU LL NEED IN THE FUTURE After you close your loan, you will receive a detailed letter from the Program Administrator. This letter should be kept with your other mortgage documents. It contains extremely important information that you will need to determine if you must pay recapture tax. The letter contains information that you ll need in order to complete Form 8828 such as The loan amount (the highest principal amount of the loan) Closing date Name of the Issuer of the Bonds, Name of the original lender that made the loan, and Chart that details data necessary to complete Form 8828 How much do I owe? The amount you owe will be the LESSER of 50% of the gain realized from the sale of your home OR the amount resulting from a calculation that uses The income percentage The maximum recapture tax or federally subsidized amount (this is.0625 x the highest principal amount of your loan The holding period percentage as shown on the chart below: Disposition Within #Months of closing Holding Period Percentage Income limit 1-2 Person Household Income 3+ Person Household % Limits will be inserted on a similar chart that % will be mailed to MCC Recipients after % closing and approval. Limits will be those % In place at time of closing of the first % Mortgage Loan that has a MCC attached % The document is called a Final % Recapture notice. The Notice and MCC will % Be mailed to approverd buyers % 109 or more No Recapture FOR MORE INFORMATION: Visit the IRS website See Form 8396 Form 8828, Recapture of Federal Mortgage Subsidy and Instructions for Form 8828 Pub 523, Selling Your Home

4 Nevada Housing Division Recapture Tax Reimbursement Policy NHD will reimburse an eligible homeowner to whom it issued an MCC if the homeowner incurred and paid a recapture tax liability. The reimbursement is conditioned on the following specific requirements: Specific Requirements 1. The original loan to which the MCC relates must be outstanding at the time of sale. NHD will not reimburse the homebuyer if the loan had been previously extinguished by any form of refinance or new loan. 2. The reimbursement request must be submitted by July 15 of the calendar year immediately following the calendar year in which the home is sold and the recapture is reported on the homebuyer(s) federal tax return. 3. NHD will reimburse only the amount of the recapture tax. NHD will not reimburse penalties or interest owed by the homebuyer(s). 4. The information on the homebuyer(s) federal tax return for the calendar year of disposition must be true and correct. How the reimbursement process works The homebuyer (s) must provide NHD with the following documentation to begin the reimbursement process: 1. A completed Request for Recapture Tax Reimbursement form (Available on NHD website or by borrower request to NHD); 2. A copy of the signed federal tax return, including IRS Form 8828 (Recapture of Federal Mortgage Subsidy) for the year in which the home was sold or otherwise disposed of; 3. A copy of the signed Closing Disclosure issued in connection with the disposition of the home; 4. An original signed IRS Form 4506 (Request for Copy of Tax Return) completed by each person listed as a borrower under the mortgage loan documents, permitting NHD to request federal tax returns, including 28

5 IRS Form NHD will pay any fees associated with the IRS 4506 form which is required as part of the reimbursement process; 5. Proof that the recapture tax was paid by the homebuyer (cancelled check and/or bank statement, etc.) or proof in the form of an IRS printout that borrower was still refunded monies even after reporting Recapture Tax on the tax return. The Request for Reimbursement package, with all documentation listed above should be mailed to: Nevada Housing Division Attn: Homebuyer Program 1830 College Parkway #200 Carson City, NV NHD will make every effort to process information within a sixty (60) day time frame. The reimbursement check will be made payable to the original homebuyer(s) listed on the MCC. Tax Information THIS NOTICE SHOULD NOT BE CONSTRUED AS TAX ADVICE. REIMBURSEMENT MAY BE TAXABLE INCOME TO MCC HOLDER IN THE YEAR RECEIVED. YOU WILL BE ISSUED AN IRS 1099 FORM (MISCELLANEOUS INCOME) FROM NHD FOR THE AMOUNT OF THE RECAPTURE TAX CLAIMED. PLEASE CONSULT TAX ADVISOR FOR FURTHER INFORMATION. 29