My state offers a mortgage program which stipulates:
The Internal Revenue Code includes a restriction relating to such mortgage loans. The Federal government treats homebuyers who purchase a residence with mortgage loans financed with proceeds of tax-exempt bonds as having received a “subsidy”. This means that, subject to certain exceptions, if a homebuyer who has received a loan financed with proceeds of tax-exempt bonds sells the residence within nine (9) years of purchase this subsidy may be “recaptured”.
My question concerns if I sell the home within 9 years, but after paying off the loan. Towards this situation the program says:
If you repay your loan in full during the nine year recapture period and you sell your home during this period, your holding period percentage may be reduced under the special rule in section 143(m)(4)(C)(ii) of the Internal Revenue Code.
I've read the referenced tax section (https://www.law.cornell.edu/uscode/text/26/143) but am not sure I understand it correctly:
If the federally-subsidized indebtedness is completely repaid during any year of the 4-year period beginning on the testing date, the holding period percentage for succeeding years shall be determined by reducing ratably to zero over the succeeding 5 years the holding period percentage which would have been determined under this subparagraph had the taxpayer disposed of his interest in the residence on the date of the repayment.
This covers repayment during the first 4 years, what if I repay it in the 5th+ year? What does "reduce ratable to zero" mean, that each year the percentage will reduce further? The tax code does show the percentage reducing in the last years but this is before taking account repayment.
I understand "recapturing" a subsidy in the event of some gain by selling a home that is financed by government bonds, but if I have paid it off in full can I really expect I owe them even more than any tax on capital gains?