26 U.S.C. § 143 — Mortgage revenue bonds: qualified mortgage bond and qualified veterans’ mortgage bond

(a) Qualified mortgage bond A "qualified mortgage bond" is a bond issued as part of a "qualified mortgage issue" (defined next). A "qualified mortgage issue" is one or more bonds issued by a state or one of its political subdivisions, but only if all of these are true: - Nearly all the money raised (except money used for issuance costs and a reasonably required reserve) must go toward financing owner-occupied homes. - The issue must meet the rules in subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7), described below. - The issue must not meet the "private business tests" in section 141(b)(1) and (2) — tests that would make it a private activity bond instead. - Except in one situation described below, when borrowers repay principal early, the issuer must use that money to buy back ("redeem") bonds from the same issue. This must happen by the end of the first six-month period after the issuer receives the repayment. This redemption rule does not apply to repayments received within the first 10 years after the bonds (or, for refunding bonds, the original bonds) were issued. Good-faith exceptions. If an issue fails to meet one or more of the requirements in subsections (c), (d), (e), (f), or (i) — the residence, 3-year, purchase-price, income, or "other requirements" rules — it can still count as meeting them if: the issuer honestly tried to meet all the requirements before the mortgages were signed; at least 95 percent of the money used for owner-financing went to homes that met all the requirements at the time the mortgages were signed; and any failure is fixed within a reasonable time after the issuer discovers it. A similar good-faith exception applies to failures involving subsections (g), (h), and (m)(7) — the arbitrage, targeted-area, and other rules. The issue still qualifies if the issuer honestly tried to meet all these requirements, and any failure was an inadvertent error that happened even though the issuer took reasonable steps to comply. 42-month deadline. Except as described next, an issue does not meet the "used to finance homes" requirement unless: all proceeds meant to finance owner-occupied homes are actually used for that purpose within 42 months of the bonds' issue date (or, for refunding bonds, within 42 months of the original bonds' issue date) — and any proceeds not so used within that period must instead be used within it to redeem bonds from the issue; and after the 42 months end, none of the proceeds may be used to make or finance any loan, other than a "nonpurpose investment" as defined in section 148(f)(6)(A). There is an exception: issuers are not required to redeem bonds with leftover amounts under $250,000, and the Secretary may by regulation treat related issues as one issue for this exception. (b) Qualified veterans' mortgage bond defined A "qualified veterans' mortgage bond" is a bond that is part of an issue where: at least 95 percent of net proceeds go toward providing homes for veterans; the principal and interest are backed by a state's general obligation; the issue meets the rules in subsections (c), (g), (i)(1), and (l); and the issue does not meet the private business tests in section 141(b)(1) and (2). The same good-faith exceptions described above in (a)(2)(B) and (C) apply here too. (c) Residence requirements For a single home to qualify: it must be a single-family home that can reasonably be expected to become the borrower's main home within a reasonable time after the loan is made, and it must be located within the area of the government issuing the bonds. For the whole issue to qualify: every home financed under the issue must meet those same two rules. (d) 3-year requirement In general, at least 95 percent of an issue's net proceeds must go to borrowers who had no ownership interest in their main home at any time during the three years before signing their mortgage — mostly first-time homebuyers. Exceptions: financing still counts toward the 95 percent, without needing to meet the first-time-buyer rule, if it funds: homes in "targeted areas" (defined below in (j)); qualified home-improvement loans or qualified rehabilitation loans (defined below in (k)); financing for certain contract-for-deed land described in (i)(1)(C) and building a home on it; or, for bonds issued after this exception became law, financing for a veteran (as defined in 38 U.S.C. § 101) who has not already used this veteran exception before. When checking whether a borrower had a prior ownership interest, the law ignores any interest the borrower has in the very home being financed by this loan. (e) Purchase price requirement In general, each home's "acquisition cost" cannot exceed 90 percent of the "average area purchase price" for homes like it. "Average area purchase price" means the average price of single-family homes in the same statistical area that sold in the most recent 12 months with enough data available, measured as of the date the lender commits to the loan (or, if earlier, the purchase date). This average is figured separately for new homes (never previously occupied) and previously-occupied homes, and regulations may also require separate figures for 1-, 2-, 3-, and 4-family homes. For targeted-area homes, the limit is 110 percent of the average price instead of 90 percent. This whole purchase-price limit does not apply to qualified home-improvement loans. (f) Income requirements In general, every borrower's family income must be no more than 115 percent of the "applicable median family income" (defined below), determined by the Secretary using the same approach used under Section 8 of the U.S. Housing Act of 1937 (or the rules in effect right before that program ended, if it has ended). Special rule for targeted areas: one-third of the financing for targeted-area homes can be given without regard to the income limit at all. The rest of that financing meets the income rule as long as the borrower's income is no more than 140 percent of the applicable median. "Applicable median family income" means whichever is higher: the area's median gross income, or the whole state's median gross income. High-cost-area adjustment: if a home is in a "high housing cost area" and a formula produces a higher limit than 115 percent, that higher limit applies instead — capped at 140 percent. The formula multiplies 115 percent by the amount the area's "housing cost/income ratio" exceeds 0.2. A "high housing cost area" is any statistical area where that ratio exceeds 1.2. The ratio itself is the area's housing price ratio divided by the ratio of the area's median income to the U.S. median income, using whichever of a new-home or existing-home price ratio brings the result closer to 1; each price ratio compares the area's average home price (from subsection (e)) to the nationwide average for the same type of home. Family-size adjustment: for a borrower with a family of fewer than 3 people, every "115 percent" above becomes "100 percent," and every "140 percent" becomes "120 percent." (g) Requirements related to arbitrage In general, an issue must meet the interest-rate-limit rule in paragraph (2), and — if it is a veterans' mortgage bond — also the profit-sharing rule in paragraph (3). These apply on top of the general arbitrage rules in section 148. Interest-rate limit: the "effective rate of interest" borrowers pay on their mortgages cannot exceed the bond's yield by more than 1.125 percentage points. Figuring the effective rate counts all fees and charges the borrower effectively bears — including points paid by the seller, and any amount a middleman charges above the normal cost of buying similar property without these bonds — but not expected arbitrage rebates, or normal application, survey, credit-report, or insurance fees that aren't higher than usual (origination fees and points are always counted). The calculation assumes mortgages prepay at the rate in the FHA's standard mortgage table, with prepayments treated as received on the last day of the month the issuer expects them; the Secretary can adjust the assumed rate by regulation. Bond yield uses the issue price (as defined in sections 1273 and 1274) and an expected maturity consistent with those prepayment assumptions. Passing along arbitrage profit (veterans' bonds only): the issuer must pay or credit mortgagors, as quickly as practical, the profit earned on "nonpurpose investments" above what the bond's yield would have earned, plus related income, counting gains and losses on selling those investments. This required amount shrinks by however much of the 1.125-point spread in paragraph (2) the issuer left unused. Instead of paying mortgagors, the issuer can elect, before issuing the bonds, to pay the United States: at least once every five years, 90 percent of what would otherwise go to mortgagors, and within 60 days after the last bond is paid off, the remaining 100 percent. The Secretary must allow a simplified accounting system that reasonably meets this paragraph's goals. "Nonpurpose investment" has the meaning given in section 148(f)(6)(A). (h) Portion of loans required to be placed in targeted areas At least 20 percent of the proceeds used for owner-financing must be made available, with reasonable effort, for targeted-area homes, for at least one year after targeted-area financing first becomes available. But the issuer never has to make available more than 40 percent of the average annual amount of single-family mortgages issued in targeted areas within its jurisdiction over the prior three years. (i) Other requirements Mortgages must be new: none of the proceeds may buy or replace an existing mortgage. Regulations can exclude from this rule replacing construction loans, bridge loans, or (for a qualifying rehabilitation) an existing mortgage. There is also an exception for certain "contract for deed" land: if a borrower's main home sits on land held under a contract for deed, and the borrower's family income is no more than 50 percent of the applicable median income, the contract for deed is not treated as an existing mortgage. A "contract for deed" means a seller-financed land contract where legal title doesn't pass until the buyer pays in full, and the seller's only remedy for nonpayment is forfeiting the property, not foreclosure. Assumption rules: if someone assumes (takes over) a mortgage financed by the issue, that assumption must still meet the residence, 3-year, and purchase-price requirements from subsections (c), (d), and (e), and whichever income requirement from subsection (f) applies. (j) Targeted area residences A "targeted area residence" is a home in either a "qualified census tract" or an "area of chronic economic distress." A "qualified census tract" is a census tract where 70 percent or more of families have income at or below 80 percent of the statewide median family income, based on the most recent decennial census data available. An "area of chronic economic distress" is an area a state designates under its own standards, with the designation approved by both the Treasury Secretary and the Secretary of Housing and Urban Development. In approving it, the two Secretaries look at the condition of the housing stock; residents' need for this financing, shown by low income, high poverty, high welfare use, and high unemployment; the potential for this financing to improve housing conditions there; and whether the area has a housing plan addressing displacement and public improvements. (k) Other definitions and special rules "Mortgage" means any owner-financing. "Statistical area" means a metropolitan statistical area, or any county (or part of one) outside a metropolitan area; the Secretary can substitute another area if a county lacks enough data, and can designate a county-equivalent area where a part of a state isn't in any county. "Acquisition cost" means the cost of buying the home as a finished unit — excluding normal settlement or financing costs, the value of work the borrower or family did themselves, and the cost of land the borrower already owned for at least two years before construction began (with an exception for certain contract-for-deed land). For a qualified rehabilitation loan, "acquisition cost" also includes the cost of the rehab work. A "qualified home improvement loan" is financing, capped at $15,000, for a homeowner's alterations, repairs, and improvements to their existing home, but only for work that substantially protects or improves the home's basic livability or energy efficiency. A "qualified rehabilitation loan" is owner-financing connected to a "qualified rehabilitation," or to buying a home that has had one (as long as the borrower is the first person to live there after the rehab). A "qualified rehabilitation" requires: at least 20 years between the building's first use and the start of the renovation; at least 50 percent of existing exterior walls kept as exterior walls, at least 75 percent kept as interior or exterior walls, and at least 75 percent of the existing internal structural framework kept in place; and renovation spending equal to at least 25 percent of the borrower's adjusted basis in the home, measured at completion or, if later, when the borrower buys it. All calculations of yield, effective interest rates, and required payments under subsection (g) must be done on an actuarial basis, accounting for the present value of money. Except for the 40 percent cap in (h)(2), "single-family" and "owner-occupied" also include 2-, 3-, or 4-family homes if one unit is owner-occupied and the building was first occupied at least 5 years before the mortgage is signed — though that 5-year rule doesn't apply to a 2-family targeted-area home if the borrower's income meets the targeted-area income rule in (f)(3)(B). For cooperative housing corporations: each apartment is treated as owned by the person who has the right to live there through owning co-op stock, and the co-op's debt tied to that apartment is treated as that shareholder's own debt. For financing to a co-op outside a targeted area, regulations may let the issue be combined with other issues when checking the targeted-area rule in (h). "Cooperative housing corporation" has the meaning given in section 216(b)(1). Limited equity cooperative housing generally is treated as rental housing, not owner-occupied housing, and its bonds follow the rules for qualified residential rental projects under section 142(d) — except this doesn't apply to bonds issued after the date named in (a)(1)(B). "Limited equity cooperative housing" means a unit someone can live in by owning stock in a "qualified cooperative housing corporation" — a co-op where: the price anyone pays for stock to live in a unit is capped at what the first stockholder paid (adjusted for cost of living), plus payments for improvements, plus payments toward paying off the co-op's acquisition or development debt; the value of the co-op's assets beyond the combined value of outstanding stock must go only to public-benefit, charitable, or the co-op's own purposes, never directly to a stockholder; and the co-op elects this treatment when the bonds are issued. Electing it means the normal co-op tax rule in section 216 does not apply during the "qualified project period" (section 142(d)(2)); the special rental-housing treatment stops if the co-op ever fails to stay qualified during that period; and the election, once made, cannot be revoked. For homes in high-cost areas helped by a "qualified program" — a government second-loan or grant program that either restricts resale price and profit-sharing for 9 years, or defers or reduces interest in exchange for the government sharing in appreciation (and isn't itself funded by tax-exempt private activity bonds) — the government's financial interest in the home is ignored under this section (except under subsection (m)), and the home's "acquisition cost" under (e) is reduced by the amount of that government financing. Disaster-area special rules: for homes in a presidentially declared disaster area (under the Stafford Act, as it existed when the Taxpayer Relief Act of 1997 was enacted), financing given within 2 years of the disaster declaration skips the 3-year first-time-buyer rule in (d), and applies the purchase-price and income rules in (e) and (f) as if the home were a targeted-area home — but only for bonds issued between May 1, 2008, and January 1, 2010. Subprime-refinancing special rules: proceeds can refinance a mortgage that was originally a "qualified subprime loan," even though (i)(1) normally bars refinancing existing mortgages. Doing this shortens the 42-month deadline in (a)(2)(D)(i) to 12 months, skips the 3-year rule in (d), and uses the home's market value at refinancing (instead of original acquisition cost) for the purchase-price rule in (e). A "qualified subprime loan" is an adjustable-rate single-family mortgage made between January 1, 2002, and December 31, 2007, that the bond issuer determines would likely cause the borrower financial hardship if not refinanced. This special rule stops applying to bonds issued after December 31, 2010. Special rules for homes destroyed or damaged in federally declared disasters: if a taxpayer's main home was made unsafe, or was demolished or relocated by government order, because of a federally declared disaster before January 1, 2010, the taxpayer can elect, for two years after the disaster declaration, to skip the 3-year rule in (d)(1) and to use 110 percent instead of 90 percent in the purchase-price rule in (e)(1). Separately, if a taxpayer's main home was merely damaged by such a disaster, the taxpayer can elect to treat financing for its repair or rebuilding as a qualified rehabilitation loan, capped at the lesser of the actual cost or $150,000. An election under this paragraph cannot be revoked without the Secretary's consent, and electing it blocks using the other disaster-area special rule for the same home. "Federally declared disaster" has the meaning in section 165(h)(3)(C)(i). (l) Additional requirements for qualified veterans' mortgage bonds An issue must meet three extra rules: only "qualified veterans" (defined below) may receive financing; the issue must be a general obligation of a state that had already issued qualified veterans' mortgage bonds before June 22, 1984; and the issue must stay within the state's "volume limitation" for the year. Volume limitation: in general, a state's yearly limit equals the total qualified veterans' bonds it issued between January 1, 1979, and June 22, 1984 (dropping its single lowest-issuing year in that span), divided by the number of years (up to 5) in that span it issued such bonds. Alaska, Oregon, and Wisconsin instead each get a flat $100,000,000 limit per year, though for years before 2010 that flat limit is phased in: 20 percent in 2006, 40 percent in 2007, 60 percent in 2008, and 80 percent in 2009. Refunding bonds generally don't count against the limit, as long as the new bond matures no later than the later of the old bond's maturity date or 32 years after the original bond was first issued, and only up to the amount of the original bond still outstanding — but this exception does not apply to "advance refunding" bonds. A "qualified veteran" is someone who served on active duty and applied for the financing within 25 years after leaving active service. There is a special rule for certain short-term (1 year or less) Oregon bonds issued under a specific state statute to finance property taxes: only 1/15 of such a bond's principal counts toward the volume limit. (m) Recapture of a portion of the federal subsidy In general, if a taxpayer disposes of their interest in a home that was financed with federally-subsidized debt, their tax for that year goes up by the smaller of: the "recapture amount" (calculated below), or 50 percent of any gain from the disposition. This recapture does not apply to a disposition caused by death, or to one that happens more than 9 years after the "testing date." "Federally-subsidized indebtedness" is debt financed even partly by a tax-exempt qualified mortgage bond, or debt for which the taxpayer got the mortgage-interest credit under section 25 — except debt that's federally-subsidized only because it's a qualified home-improvement loan doesn't count. The "recapture amount" equals the "federally-subsidized amount" (6.25 percent of the highest principal balance the taxpayer was ever liable for) times the "holding period percentage" times the "income percentage." The holding period percentage follows a table rising from 20 percent in year 1 to 100 percent in year 5, then falling back to 20 percent by year 9 (zero after that). If the debt is fully paid off within the first 4 years after the testing date, the holding-period percentage for later years is instead phased down to zero over the following 5 years, based on what it would have been on the payoff date. The "testing date" is the earliest date the debt is both federally-subsidized and the taxpayer is liable for it. The "income percentage," capped at 100 percent, is the taxpayer's modified adjusted gross income minus the "adjusted qualifying income," divided by $5,000, rounded to the nearest whole percent (a half-percent rounds up). "Adjusted qualifying income" is the highest family income that would have qualified under subsection (f) when the financing was provided (ignoring the targeted-area exception in (f)(3)(A), and using the taxpayer's family size as of the disposition), multiplied by 1.05 raised to the power of the number of full years between the financing and the disposition. "Modified adjusted gross income" is adjusted gross income, plus tax-exempt interest excluded under section 103, minus any gain included in gross income because of this same disposition. Gain is counted whether or not it's actually recognized for other tax purposes, and the home's basis is figured without regard to the old involuntary-conversion basis rules in sections 1033(b) and 1034(e). If the disposition isn't a sale, exchange, or involuntary conversion, gain is calculated as if the interest had been sold at fair market value. If the home is involuntarily converted by fire, storm, or other casualty, this recapture does not apply if the taxpayer buys a replacement main home on the same site within the time allowed under section 1033(a)(2)(B); in that case, the home's basis isn't adjusted for any gain or loss from the conversion. The issuer that provided the federally-subsidized loan must tell the borrower about potential recapture in writing at settlement, and must send a separate written statement within 90 days of providing the loan, spelling out the federally-subsidized amount and the adjusted qualifying income for each family size, for each year of the 9-year period after the loan was provided. No adjustment is made to a property's basis because of this recapture tax. If two or more people jointly own a home and are jointly liable for the debt, the recapture amount is generally figured separately for each person's share — except for transfers between spouses or ex-spouses where no gain or loss is recognized under section 1041; there, this recapture doesn't apply to the transfer itself, and the person receiving the property is treated the way the transferring spouse would have been treated. The Secretary must issue regulations needed to carry out this subsection, including for cases where someone disposes of only a partial interest in a home.