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I have a question similar to the one I'm looking at. The MCC…

I have a question...

I have a question similar to the one I'm looking at. The MCC recapture tax and getting a $500K deduction from selling my primary residence. Can you help me with this?

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I'm about to receive a capital gain of $310K from selling my primary residence. I'd like to file as married filling jointly to deduct the full $310K. BUT I have an MCC, and would owe $20K if my spouse's income counts as a "CO- MORTGAGOR". My spouse was never on the original mortgage, they came along later. I believe my spouse fits the requirements for '2 years of use' in the house, but I'd like to exclude their income for the 'CO- MORTGAGOR’S' on the MCC.

Accountant's Assistant: Is there anything else the Accountant should be aware of?

I'm in the 25% federal tax bracket and 9.3% tax bracket in California.

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Answered in 4 minutes by:
3/12/2018
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,894
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. My name’s Lane …

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, to clients on three continents, since 1986.

I’m reading your question now.

Bear with me a moment while I type up my response.

….

Then if you have further questions we can go from there.

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If I understand your question, you're talking about a Mortgage credit Certificate and the exclusion of gain on primary residence from your federal tax return (which automatically exempts from the California return, as the starting point for California state income tax is the federal AGI)

...

Is that correct?

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OK, still don't so you coming into the chat here so let me lay the foundation.

...

First, the two MAY not be linked (unless your loan originator want's continual - ongoing - reporting of income from tax returns.

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Second, (I may be stating the obvious here, but)

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Capital gain = Sales Price - basis (where basis is purchase price plus improvements plus selling costs) so, just wanted to be sure you NEEDED all 500,000 of the capital gains exclusion.

...

MCC's vary by state. Can you tell me why you believe that filing jointly would be a problem - given that you're now be paying off the loan as part of the sale?

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Customer reply replied 5 months ago
Hi Lane, thx for getting back to me so quickly!
I’m in CA, and I bought my SF condo five years ago, and will need the cap gains exclusion of $310K, as I bought in at about 600 and it sold for 910k.
Customer reply replied 5 months ago
Filing jointly would potentially be a problem, as my wife and I together have an AGI that is high enough that we would be subject to recapture tax.
Customer reply replied 5 months ago
But if it’s just my AGI, then I don’t make enough money. And I definitely wouldn’t need to pay back the recapture tax. The recapture tax would be about $20k.

OK, lets look at the math.

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Filing as married filing separately, you'd get a 250,000 exclusion meaning that you'd have to include 60,000 as a capital gain.

...

60,000 x .15 = 9000

...

I'd take the 9000 vs the 20,000 any day.

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Customer reply replied 5 months ago
But there’s a chance I won’t have to pay either 9000 or 20,000 right? If my wife isn’t considered a co-mortgagor for the MCC, then I can take the full 500k cap gains deduction and not have to pay the recapture tax. It feels like a $9000 question.

That's right. And that question I think only your state and/or the mortgage lender - who should be providing that kind of information - can answer.

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My iunderstanding of the California MCC is that all three of the following events have to happen for Recapture Tax to apply:

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1. You sell your home within 9 years of buying it; and

2. Your household income rises significantly over the life of the loan (generally more than 5% per year); and

3. You have a gain on the sale of your home

..

Also, the amount due will never exceed 50% of the gain on the sale or 6.25% of the original mortgage loan amount, whichever is less.

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Now, with respect to this "co--mortgagor terminology, what I see inthe code is this, under the special rules (26 USC 143)

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(B)Special rule where 2 or more persons hold interests in residence

Except as provided in subparagraph (C) and in regulations prescribed by the Secretary, if 2 or more persons hold interests in any residence and are jointly liable for the federally-subsidized indebtedness, the recapture amount shall be determined separately with respect to their respective interests in the residence.

...

(paragraph C related to transfers pursuant to a divorce so not relevant here)

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Question. WHo is on the title and who is on the loan? (two different issues)

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Customer reply replied 5 months ago
My name is ***** ***** thing on the title and loan.
Customer reply replied 5 months ago
I don’t think my wife holds interest in residence for the federally subsidized indebtness. She didn’t pay any monies toward the mortgage.

It's he ownership interest in the property that the federal code is referencing.

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And if she's not obligated on the loan, the only rub I can see is their somehow assigning her income to the income testing.

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She's NOT a co-mortgagor in andebor creditor law sense/

...

One more question; where did you get the terminology co-mortgagor. I can tell you that for purpose of debtor/creditor law under ANY common law state she is not considered a co-mortgagor.

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Customer reply replied 5 months ago
The term co-mortgagor came from the MCC recapture worksheet, which requires you to put the name of the mortgagor (me) and any co-mortgagors. This is from the SF Mayors office of Housing MCC worksheet.
Customer reply replied 5 months ago
Here's a URL to the worksheet, not sure if it will come through the chat: http://sfmohcd.org/sites/default/files/Recapture%20Notice%20and%20Computation%20Worksheet%20%28MCC%208%29%205.2017.pdf

Yes but she's not a co-mortgagor - not for federal tax purposes

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,894
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane and 87 other Tax Specialists are ready to help you
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Customer reply replied 5 months ago
great, thank you for your help, this was amazing!

Glad to help. Thanks for the rating.

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