PROVISIONS RELATING TO MORTGAGE REVENUE BONDS AND MORTGAGE CREDIT CERTIFICATES.

SEC. 4005. PROVISIONS RELATING TO MORTGAGE REVENUE BONDS AND MORTGAGE CREDIT CERTIFICATES. (a) Extension of Authority To Issue Bonds and Certificates.— (1) Subparagraph (B) of section 143(a)(1) of the 1986 Code (relating to termination) is amended by striking out “December 31, 1988” each place it appears and inserting in lieu thereof “December 31, 1989” (2) Subsection (h) of section 25 of the 1986 Code (relating to credit for interest on certain home mortgages), as amended by section 1013(a)(26) of this Act, is amended by striking out “1988” and inserting in lieu thereof “1989”. (b) Calculation of Income Limits for Qualified Mortgage Bond Financed Homes in High Housing Cost Areas.— Section 143(f) of the 1986 Code (relating to income requirements) is amended by adding at the end thereof the following new paragraph: “(5) Adjustment of income requirement based on relation of high housing costs to income.— “(A) In general.— If the residence (for which financing is provided under the issue) is located in a high housing cost area and the limitation determined under this paragraph is greater than the limitation otherwise applicable under paragraph (1), there shall be substituted for the income limitation in paragraph (1), a limitation equal to the percentage determined under subparagraph (B) of the area median gross income for such area. “(B) Income requirements for residences in high housing cost area.— The percentage determined under this subparagraph for a residence located in a high housing cost area is the percentage (not greater than 140 percent) equal to the product of— “(I) 115 percent, and “(II) the amount by which the housing cost/income ratio for such area exceeds 0.2. “(C) High housing cost areas.— For purposes of this paragraph, the term ‘high housing cost area’ means any statistical area for which the housing cost/income ratio is greater than 1.2. “(D) Housing cost/income ratio.— For purposes of this paragraph— “(i) In general.— The term ‘housing cost/income ratio’ means, with respect to any statistical area, the number determined by dividing— “(I) the applicable housing price ratio for such area, by “(II) the ratio which the area median gross income for such area bears to the median gross income for the United States. “(ii) Appucable housing price ratio.— For purposes of clause (i), the applicable housing price ratio for any area is the new housing price ratio or the existing housing price ratio, whichever results in the housing cost/income ratio being closer to 1. “(iii) New housing price ratio.— The new housing price ratio for any area is the ratio which— 102 STAT. 3646 “(I) the average area purchase price (as defined in subsection (e)(2)) for residences described in subsection (e)(3)(A) which are located in such area bears to “(II) the average purchase price (determined in accordance with the principles of subsection (e)(2)) for residences so described which are located in the United States. “(iv) Existing housing price ratio.— The existing housing price ratio for any area is the ratio determined in accordance with clause (iii) but with respect to residences described in subsection (e)(3)(B).” (c) Determinations of Family Income To Be Based on Family Size.— Subsection (f) of section 143 of the 1986 Code (relating to income requirements) is further amended by adding at the end thereof the following new paragraph: “(6) Adjustment to income requirements based on family size.— In the case of a mortgagor having a family of fewer than 3 individuals, the preceding provisions of this subsection shall be applied by substituting— “(A) ‘100 percent’ for ‘115 percent’ each place it appears, and “(B) ‘120 percent’ for T40 percent’ each place it appears.” (d) Qualified Mortgage Bonds Subject to Arbitrage Rebate Rules Applicable to Other Tax-Exempt Bonds.— (1) Paragraph (1) of section 143(g) of the 1986 Code (relating to requirements related to arbitrage) is amended— (A) by striking out “paragraphs (2) and (3) of this subsection” and inserting in lieu thereof “paragraph (2) of this subsection and, in the case of an issue described in subsection (b)(1), such issue also meets the requirements of paragraph (3) of this subsection”, and (B) by striking out “(other than subsection (f) thereof)”. (2) Paragraph (1) of section 148(f) of the 1986 Code is amended by striking out “qualified mortgage bond or”. (e) Loans Provided Through Qualified Mortgage Issue Must Originate Within 42 Months of Date of Issue.— Paragraph (2) of section 143(a) of the 1986 Code (defining qualified mortgage issue) is amended by adding at the end thereof the following new subparagraph: “(D) Proceeds must be used within 42 months of date of issuance.— “(i) In general.— Except as otherwise provided in this subparagraph, an issue shall not meet the requirement of subparagraph (A)(i) unless— “(I) all proceeds of the issue required to be used to finance owner-occupied residences are so used within the 42-month period beginning on the date of issuance of the issue (or, in the case of a refunding bond, within the 42-month period beginning on the date of issuance of the original bond) or, to the extent not so used within such period, are used within such period to redeem bonds which are part of such issue, and “(II) no portion of the proceeds of the issue are used to make or finance any loan (other than a loan which is a nonpurpose investment within the102 STAT. 3647 meaning of section 148(f)(6)(A)) after the close of such period. “(ii) Exception.— Clause (i) (and clause (iv) of subparagraph (A)) shall not be construed to require amounts of less than $250,000 to be used to redeem bonds. The Secretary may by regulation treat related issues as 1 issue for purposes of the preceding sentence.” (f) Repayments of Financing Provided by a Qualified Mortgage Issue Must Be Used To Redeem Bonds.— Subparagraph (A) of section 143(a)(2) of the 1986 Code is amended by striking out “and” at the end of clause (ii), by striking out the period at the end of clause (iii) and inserting in lieu thereof “, and”, and by adding at the end thereof the following: “(iv) except as provided in subparagraph (D)(ii), repayments of principal on financing provided by the issue are used not later than the close of the 1st semiannual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds which are part of such issue. Clause (iv) shall not apply to amounts received within 10 years after the date of issuance of the issue (or, in the case of refunding bond, the date of issuance of the original bond).” (g) Recapture of Portion of Federal Subsidy From Use of Mortgage Bonds and Mortgage Credit Certificates.— (1) In general.— Section 143 of the 1986 Code (relating to mortgage revenue bonds) is amended by adding at the end thereof the following new subsection: “(m) Recapture of Portion of Federal Subsidy From Use of Qualified Mortgage Bonds and Mortgage Credit Certificates.— “(1) In general.— If, during the taxable year, any taxpayer disposes of an interest in a residence with respect to which there is or was any federally-subsidized indebtedness for the payment of which the taxpayer was liable in whole or part, then the taxpayer’s tax imposed by this chapter for such taxable year shall be increased by the recapture amount with respect to such indebtedness. “(2) Exceptions.— Paragraph (1) shall not apply to— “(A) any disposition by reason of death, and “(B) any disposition which is more than 10 years after the testing date. “(3) Federally-subsidized indebtedness.— For purposes of this subsection— “(A) In general.— The term ‘federally-subsidized indebtedness’ means any indebtedness if— “(i) financing for the indebtedness was provided in whole or part from the proceeds of any tax-exempt qualified mortgage bond, or “(ii) any credit was allowed under section 25 (relating to interest on certain home mortgages) to the taxpayer for interest paid or incurred on such indebtedness. “(B) Exception for home improvement loans.— Such term shall not include any indebtedness to the extent such indebtedness is federally-subsidized indebtedness solely by reason of being a qualified home improvement loan (as defined in subsection (k)(4)). 102 STAT. 3648 “(4) Recapture amount.— For purposes of this subsection— “(A) In general.— The recapture amount with respect to any indebtedness is the amount equal to the product of— “(i) the federally-subsidized amount with respect to the indebtedness, and “(ii) the holding period percentage. “(B) Federally-subsidized amount.— The federally-subsidized amount with respect to any indebtedness is the amount equal to 6.25 percent of the highest principal amount of the indebtedness for which the taxpayer was liable. “(C) Holding period percentage.— “(i) Dispositions during 1st 5 years.— If the disposition of the taxpayer’s interest in the residence occurs during the 5-year period beginning on the testing date, the holding period percentage is the percentage determined by dividing the number of full months during which the requirements of subparagraph (D) were met by 60. “(ii) Dispositions during 2d 5 years.— If the disposition of the taxpayer’s interest in the residence occurs during the 5-year period following the 5-year period described in clause (i), the holding period percentage is the percentage determined by dividing— “(I) the excess of 120 over the number of full months during which such requirements were met by “(II) 60. “(iii) Retirements of indebtedness.— If the federally-subsidized indebtedness is completely repaid during any month of the 10-year period beginning on the testing date, the holding period percentage for succeeding months shall be determined by reducing ratably over the remainder of such period (or, if lesser, 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. “(D) Testing date.— The term ‘testing date’ means the earliest date on which all of the following requirements are met; “(i) The indebtedness is federally-subsidized indebtedness. “(ii) The taxpayer is liable in whole or part for payment of the indebtedness. “(5) Reduction of recapture amount if taxpayer meets certain income limitations.— “(A) In general.— The recapture amount which would (but for this paragraph) apply with respect to any disposition during a taxable year shall be reduced (but not below zero) by 2 percent of such amount for each $100 by which adjusted qualifying income exceeds the modified adjusted gross income of the taxpayer for such year. “(B) Adjusted qualifying income.— For purposes of this paragraph, the term ‘adjusted qualifying income’ means the amount equal to the sum of— “(i) $5,000, plus 102 STAT. 3649 “(ii) the product of— “(I) the highest family income which (as of the date the financing was provided) would have met the requirement of subsection (f) with respect to the residence, and “(II) the percentage equal to the sum of 100 percent plus 5 percent for each full year during the period beginning on such date and ending on the date of the disposition. For purposes of clause (ii)(I), highest family income shall be determined without regard to subsection (i)(3)(A) and on the basis of the number of members of the taxpayer’s family as of the date of the disposition. “(C) Modified adjusted gross income.— For purposes of this paragraph, the term ‘modified adjusted gross income’ means adjusted gross income— “(i) increased by the amount of interest received or accrued by the taxpayer during the taxable year which is excluded from gross income under section 103, and “(ii) decreased by the amount of gain (if any) included in gross income of the taxpayer by reason of the disposition to which this subsection applies. “(6) Limitation on recapture amount based on gain realized.— “(A) In general.— In no event shall the recapture amount of the taxpayer with respect to any indebtedness exceed 50 percent of the gain (if any) on the disposition of the taxpayer’s interest in the residence. For purposes of the preceding sentence, gain shall be taken into account whether or not recognized, and the adjusted basis of the taxpayer’s interest in the residence shall be determined without regard to sections 1033(b) and 1034(e) for purposes of determining gain. “(B) Dispositions other than sales, exchanges, and involuntary conversions.— In the case of a disposition other than a sale, exchange, or involuntary conversion, gain shall be determined as if the interest had been sold for its fair market value. “(C) Involuntary conversions resulting from casualties.— In the case of property which (as a result of its destruction in whole or in part by fire, storm, or other casualty) is compulsorily or involuntarily converted, paragraph (1) shall not apply to such conversion if the taxpayer purchases (during the period specified in section 1033(a)(2)(B)) property for use as his principal residence on the site of the converted property. For purposes of subparagraph (A), the adjusted basis of the taxpayer in the residence shall not be adjusted for any gain or loss on a conversion to which this subparagraph applies. “(7) Issuer to inform mortgagor of federally-subsidized amount and family income limits.— The issuer of the issue which provided the federally-subsidized indebtedness to the mortgagor shall— “(A) at the time of settlement, provide a written statement informing the mortgagor of the potential recapture under this subsection, and 102 STAT. 3650 “(B) not later than 90 days after the date such indebtedness is provided, provide a written statement to the mortgagor specifying— “(i) the federally-subsidized amount with respect to such indebtedness, and “(ii) the amounts described in paragraph (5)(B)(ii) for each category of family size for each year of the 10-year period beginning on the date the financing was provided. “(8) Special rules.— “(A) No basis adjustment.— No adjustment shall be made to the basis of any property for the increase in tax under this subsection. “(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. “(C) Transfers to spouses and former spouses.— Paragraph (1) shall not apply to any transfer on which no gain or loss is recognized under section 1041. In any such case, the transferee shall be treated under this subsection in the same manner as the transferor would have been treated had such transfer not occurred. “(D) Regulations.— The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this subsection, including regulations dealing with dispositions of partial interests in a residence.” (2) Issuer information requirement.— (A) Subparagraph (A) of section 143(a)(2) of the 1986 Code is amended by striking out “and (i)” and inserting in lieu thereof “(i), and (m)(7)”. (B) Subparagraph (C) of section 143(a)(2) of the 1986 Code is amended by striking out “and (h)” and inserting in lieu thereof“, (h), and (m)(7)”. (3) Broker reporting.— Subsection (e) of section 6045 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(3) Whether seller’s financing was federally-subsidized.— In the case of a real estate transaction involving a residence, the real estate broker shall specify on the return under subsection (a) and the statement under subsection (b) whether or not the financing (if any) of the seller was federally-subsidized indebtedness (as defined in section 143(m)(3)).” (4) No credits against tax.— Paragraph (2) of section 26(b) of the 1986 Code (relating to limitation based on tax liability; definition of tax liability), as amended by title I of this Act, is amended by striking out “and” at the end of subparagraph (K), by striking out the period at the end of subparagraph (L) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new subparagraph: “(M) section 143(m) (relating to recapture of portion of federal subsidy from use of mortgage bonds and mortgage credit certificates),” 102 STAT. 3651 (5) Recapture tax not included in estimated taxes.— Paragraph (1) of section 6654(f) of the 1986 Code (relating to failure by individual to pay estimated income tax) is amended by inserting “(other than any increase in such tax by reason of section 143(m))” after “chapter 1”. (6) Authority to change prepayment assumptions for arbitrage restrictions.—Clause (iv) of section 143(g)(2)(B) of the 1986 Code is amended by adding at the end thereof the following new sentence: “The Secretary may by regulation adjust the mortgage prepayment rate otherwise used in determining the effective rate of interest to the extent the Secretary determines that such an adjustment is appropriate by reason of the impact of subsection (m).” (7) Cross reference.— Section 25 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(j) Recapture of Portion of Federal Subsidy From Use of Mortgage Credit Certificates.— “For provisions increasing the tax imposed by this chapter to recapture a portion of the Federal subsidy from the use of mortgage credit certificates, see section 1431 mi.” (h) Effective Dates.— (1) In general.— Except as otherwise provided in this subsection, the amendments made by this section shall apply to bonds issued, and nonissued bond amounts elected, after December 31, 1988. (2) Special rules relating to certain requirements and refunding bonds.— In the case of a bond issued to refund (or which is part of a series of bonds issued to refund) a bond issued before January 1, 1989— (A) the amendments made by subsections (b) and (c) shall apply to financing provided after the date of issuance of the refunding issue, and (B) the amendment made by subsection (f) shall apply to payments (including on loans made before such date of issuance) received on or after such date of issuance. (3) Subsection (g).— (A) In general.— Except as provided in subparagraph (B), the amendments made by subsection (g) shall apply to financing provided, and mortgage credit certificates issued, after December 31, 1990. (B) Exception.— The amendments made by subsection (g) shall not apply to financing provided pursuant to a binding contract (entered into before June 23, 1988) with a home-builder, lender, or mortgagor if the bonds (the proceeds of which are used to provide such financing) are issued— (i) before June 23, 1988, or (ii) before August 1, 1988, pursuant to a written application (made before July 1, 1988) for State bond volume authority. (i) Study of Recapture Provisions.— The Comptroller General of the United States shall conduct a study of section 143(m) of the 1986 Code (as added by this section) and of alternatives to accomplish the purposes of such section. A report of such study shall be submitted not later than July 1, 1990, to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.