---
kind: "section"
citation: "26 U.S.C. § 143"
title: "26"
title_heading: "Internal Revenue Code"
number: "143"
heading: "Mortgage revenue bonds: qualified mortgage bond and qualified veterans’ mortgage bond"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/143"
units:
  - "Subtitle A — Income Taxes"
  - "Chapter 1 — Normal Taxes and Surtaxes"
  - "Subchapter B — Computation of Taxable Income"
  - "Part IV — Tax Exemption Requirements for State and Local Bonds"
  - "Subpart A — Private Activity Bonds"
---

# §143. Mortgage revenue bonds: qualified mortgage bond and qualified veterans’ mortgage bond

- (a) **Qualified mortgage bond—**
  - (1) **Qualified mortgage bond defined—** For purposes of this title, the term “[qualified mortgage](/usc/26/860G.md?p=a-3) [bond](/usc/26/150.md?p=a-1)” means a [bond](/usc/26/150.md?p=a-1) which is issued as part of a [qualified mortgage](/usc/26/860G.md?p=a-3) issue.
  - (2) **Qualified mortgage issue defined—**
    - (A) **Definition—** For purposes of this title, the term “[qualified mortgage](/usc/26/860G.md?p=a-3) issue” means an issue by a State or political subdivision thereof of 1 or more [bonds](/usc/26/150.md?p=a-1), but only if—
      - (i) all proceeds of such issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences,
      - (ii) such issue meets the requirements of subsections [(c)](#c), [(d)](#d), [(e)](#e), [(f)](#f), [(g)](#g), [(h)](#h), [(i)](#i), and [(m)(7)](#m-7),
      - (iii) such issue does not meet the private business tests of paragraphs [(1)](/usc/26/141.md?p=b-1) and [(2)](/usc/26/141.md?p=b-2) of section 141(b), and
      - (iv) except as provided in [subparagraph (D)(ii)](#a-2-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](/usc/26/150.md?p=a-1) which are part of such issue.

      [Clause (iv)](#a-2-A-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](/usc/26/150.md?p=a-1), the date of issuance of the original [bond](/usc/26/150.md?p=a-1)).

    - (B) **Good faith effort to comply with mortgage eligibility requirements—** An issue which fails to meet 1 or more of the requirements of subsections [(c)](#c), [(d)](#d), [(e)](#e), [(f)](#f), and [(i)](#i) shall be treated as meeting such requirements if—
      - (i) the issuer in good faith attempted to meet all such requirements before the mortgages were executed,
      - (ii) 95 percent or more of the proceeds devoted to owner-financing was devoted to residences with respect to which (at the time the mortgages were executed) all such requirements were met, and
      - (iii) any failure to meet the requirements of such subsections is corrected within a reasonable period after such failure is first discovered.
    - (C) **Good faith effort to comply with other requirements—** An issue which fails to meet 1 or more of the requirements of subsections [(g)](#g), [(h)](#h), and [(m)(7)](#m-7) shall be treated as meeting such requirements if—
      - (i) the issuer in good faith attempted to meet all such requirements, and
      - (ii) any failure to meet such requirements is due to inadvertent error after taking reasonable steps to comply with such requirements.
    - (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)](#a-2-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](/usc/26/150.md?p=a-1), within the 42-month period beginning on the date of issuance of the original [bond](/usc/26/150.md?p=a-1)) or, to the extent not so used within such period, are used within such period to redeem [bonds](/usc/26/150.md?p=a-1) 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 the meaning of [section 148(f)(6)(A)](/usc/26/148.md?p=f-6-A)) after the close of such period.
      - (ii) **Exception—** [Clause (i)](#a-2-D-i) (and [clause (iv)](#a-2-A-iv) of subparagraph (A)) shall not be construed to require amounts of less than $250,000 to be used to redeem [bonds](/usc/26/150.md?p=a-1). The Secretary may by regulation treat related issues as 1 issue for purposes of the preceding sentence.
- (b) **Qualified veterans’ mortgage bond defined—** For purposes of this part, the term “qualified veterans’ mortgage [bond](/usc/26/150.md?p=a-1)” means any [bond](/usc/26/150.md?p=a-1)—
  - (1) which is issued as part of an issue 95 percent or more of the [net proceeds](/usc/26/150.md?p=a-3) of which are to be used to provide residences for veterans,
  - (2) the payment of the principal and [interest](/usc/26/856.md?p=f-1) on which is secured by the general obligation of a State,
  - (3) which is part of an issue which meets the requirements of subsections [(c)](#c), [(g)](#g), [(i)(1)](#i-1), and [(l)](#l), and
  - (4) which is part of an issue which does not meet the private business tests of paragraphs [(1)](/usc/26/141.md?p=b-1) and [(2)](/usc/26/141.md?p=b-2) of section 141(b).

  Rules similar to the rules of subparagraphs [(B)](#a-2-B) and [(C)](#a-2-C) of subsection (a)(2) shall apply to the requirements specified in paragraph (3) of this subsection.

- (c) **Residence requirements—**
  - (1) **For a residence—** A residence meets the requirements of this subsection only if—
    - (A) it is a single-family residence which can reasonably be expected to become the principal residence of the mortgagor within a reasonable time after the financing is provided, and
    - (B) it is located within the jurisdiction of the authority issuing the [bond](/usc/26/150.md?p=a-1).
  - (2) **For an issue—** An issue meets the requirements of this subsection only if all of the residences for which owner-financing is provided under the issue meet the requirements of [paragraph (1)](#c-1).
- (d) **3-year requirement—**
  - (1) **In general—** An issue meets the requirements of this subsection only if 95 percent or more of the [net proceeds](/usc/26/150.md?p=a-3) of such issue are used to finance the residences of mortgagors who had no present ownership [interest](/usc/26/856.md?p=f-1) in their principal residences at any time during the 3-year period ending on the date their mortgage is executed.
  - (2) **Exceptions—** For purposes of [paragraph (1)](#d-1), the proceeds of an issue which are used to provide—
    - (A) financing with respect to targeted area residences,
    - (B) qualified home improvement loans and qualified rehabilitation loans,
    - (C) financing with respect to land described in [subsection (i)(1)(C)](#i-1-C) and the construction of any residence thereon, and
    - (D) in the case of [bonds](/usc/26/150.md?p=a-1) issued after the date of the enactment of this subparagraph, financing of any residence for a veteran (as defined in [section 101 of title 38](/usc/38/101.md), United States Code), if such veteran has not previously qualified for and received such financing by reason of this subparagraph,

    shall be treated as used as described in [paragraph (1)](#d-1).

  - (3) **Mortgagor’s interest in residence being financed—** For purposes of [paragraph (1)](#d-1), a mortgagor’s [interest](/usc/26/856.md?p=f-1) in the residence with respect to which the financing is being provided shall not be taken into account.
- (e) **Purchase price requirement—**
  - (1) **In general—** An issue meets the requirements of this subsection only if the acquisition cost of each residence the owner-financing of which is provided under the issue does not exceed 90 percent of the average area [purchase](/usc/26/1361.md?p=e-1-C) price applicable to such residence.
  - (2) **Average area purchase price—** For purposes of [paragraph (1)](#e-1), the term “average area [purchase](/usc/26/1361.md?p=e-1-C) price” means, with respect to any residence, the average [purchase](/usc/26/1361.md?p=e-1-C) price of single family residences (in the statistical area in which the residence is located) which were purchased during the most recent 12-month period for which sufficient statistical information is available. The [determination](/usc/26/1313.md?p=a) under the preceding sentence shall be made as of the date on which the commitment to provide the financing is made (or, if earlier, the date of the [purchase](/usc/26/1361.md?p=e-1-C) of the residence).
  - (3) **Separate application to new residences and old residences—** For purposes of this subsection, the [determination](/usc/26/1313.md?p=a) of average area [purchase](/usc/26/1361.md?p=e-1-C) price shall be made separately with respect to—
    - (A) residences which have not been previously occupied, and
    - (B) residences which have been previously occupied.
  - (4) **Special rule for 2 to 4 family residences—** For purposes of this subsection, to the extent provided in regulations, the [determination](/usc/26/1313.md?p=a) of average area [purchase](/usc/26/1361.md?p=e-1-C) price shall be made separately with respect to 1 family, 2 family, 3 family, and 4 family residences.
  - (5) **Special rule for targeted area residences—** In the case of a targeted area residence, [paragraph (1)](#e-1) shall be applied by substituting “110 percent” for “90 percent”.
  - (6) **Exception for qualified home improvement loans—** [Paragraph (1)](#e-1) shall not apply with respect to any qualified home improvement loan.
- (f) **Income requirements—**
  - (1) **In general—** An issue meets the requirements of this subsection only if all owner-financing provided under the issue is provided for mortgagors whose family income is 115 percent or less of the applicable median family income.
  - (2) **Determination of family income—** For purposes of this subsection, the family income of mortgagors, and area median gross income, shall be determined by the Secretary after taking into account the regulations prescribed under section 8 of the [United States](/usc/26/993.md?p=g) Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination).
  - (3) **Special rule for applying paragraph (1) in the case of targeted area residences—** In the case of any financing provided under any issue for targeted area residences—
    - (A) ⅓ of the amount of such financing may be provided without regard to [paragraph (1)](#f-1), and
    - (B) [paragraph (1)](#f-1) shall be treated as satisfied with respect to the remainder of the owner financing if the family income of the mortgagor is 140 percent or less of the applicable median family income.
  - (4) **Applicable median family income—** For purposes of this subsection, the term “applicable median family income” means, with respect to a residence, whichever of the following is the greater:
    - (A) the area median gross income for the area in which such residence is located, or
    - (B) the statewide median gross income for the State in which such residence is located.
  - (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)](#f-1), there shall be substituted for the income limitation in [paragraph (1)](#f-1), a limitation equal to the percentage determined under [subparagraph (B)](#f-5-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](/usc/26/993.md?p=g).
      - (ii) **Applicable housing price ratio—** For purposes of [clause (i)](#f-5-D-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—
        - (I) the average area [purchase](/usc/26/1361.md?p=e-1-C) price (as defined in [subsection (e)(2)](#e-2)) for residences described in [subsection (e)(3)(A)](#e-3-A) which are located in such area bears to
        - (II) the average [purchase](/usc/26/1361.md?p=e-1-C) price (determined in accordance with the principles of [subsection (e)(2)](#e-2)) for residences so described which are located in the [United States](/usc/26/993.md?p=g).
      - (iv) **Existing housing price ratio—** The existing housing price ratio for any area is the ratio determined in accordance with [clause (iii)](#f-5-D-iii) but with respect to residences described in [subsection (e)(3)(B)](#e-3-B).
  - (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 “140 percent” each place it appears.
- (g) **Requirements related to arbitrage—**
  - (1) **In general—** An issue meets the requirements of this subsection only if such issue meets the requirements of paragraph (2) of this subsection and, in the case of an issue described in [subsection (b)(1)](#b-1), such issue also meets the requirements of paragraph (3) of this subsection. Such requirements shall be in addition to the requirements of section 148.
  - (2) **Effective rate of mortgage interest cannot exceed bond yield by more than 1.125 percentage points—**
    - (A) **In general—** An issue shall be treated as meeting the requirements of this paragraph only if the excess of—
      - (i) the effective rate of [interest](/usc/26/856.md?p=f-1) on the mortgages provided under the issue, over
      - (ii) the yield on the issue,

      is not greater than 1.125 percentage points.

    - (B) **Effective rate of mortgage interest—**
      - (i) **In general—** In determining the effective rate of [interest](/usc/26/856.md?p=f-1) on any mortgage for purposes of this paragraph, there shall be taken into account all fees, charges, and other amounts borne by the mortgagor which are attributable to the mortgage or to the [bond](/usc/26/150.md?p=a-1) issue.
      - (ii) **Specification of some of the amounts to be treated as borne by the mortgagor—** For purposes of [clause (i)](#g-2-B-i), the following items (among others) shall be treated as borne by the mortgagor:
        - (I) all points or similar charges paid by the seller of the [property](/usc/26/317.md?p=a), and
        - (II) the excess of the amounts received from any person other than the mortgagor by any person in connection with the acquisition of the mortgagor’s [interest](/usc/26/856.md?p=f-1) in the [property](/usc/26/317.md?p=a) over the usual and reasonable acquisition costs of a person acquiring like [property](/usc/26/317.md?p=a) where owner-financing is not provided through the use of [qualified mortgage](/usc/26/860G.md?p=a-3) [bonds](/usc/26/150.md?p=a-1) or qualified veterans’ mortgage [bonds](/usc/26/150.md?p=a-1).
      - (iii) **Specification of some of the amounts to be treated as not borne by the mortgagor—** For purposes of [clause (i)](#g-2-B-i), the following items shall not be taken into account:
        - (I) any expected rebate of arbitrage profits, and
        - (II) any application fee, survey fee, credit report fee, insurance charge, or similar amount to the extent such amount does not exceed amounts charged in such area in cases where owner-financing is not provided through the use of [qualified mortgage](/usc/26/860G.md?p=a-3) [bonds](/usc/26/150.md?p=a-1) or qualified veterans’ mortgage [bonds](/usc/26/150.md?p=a-1).

      Subclause (II) shall not apply to origination fees, points, or similar amounts.

      - (iv) **Prepayment assumptions—** In determining the effective rate of [interest](/usc/26/856.md?p=f-1)—
        - (I) it shall be assumed that the mortgage prepayment rate will be the rate set forth in the most recent applicable mortgage maturity experience table published by the Federal Housing Administration, and
        - (II) prepayments of principal shall be treated as received on the last day of the month in which the issuer reasonably expects to receive such prepayments.

      The Secretary may by regulation adjust the mortgage prepayment rate otherwise used in determining the effective rate of [interest](/usc/26/856.md?p=f-1) to the extent the Secretary determines that such an adjustment is appropriate by reason of the impact of [subsection (m)](#m).

    - (C) **Yield on the issue—** For purposes of this subsection, the yield on an issue shall be determined on the basis of—
      - (i) the [issue price](/usc/26/1278.md?p=a-5) (within the meaning of sections [1273](/usc/26/1273.md) and [1274](/usc/26/1274.md)), and
      - (ii) an expected maturity for the [bonds](/usc/26/150.md?p=a-1) which is consistent with the assumptions required under [subparagraph (B)(iv)](#g-2-B-iv).
  - (3) **Arbitrage and investment gains to be used to reduce costs of owner-financing—**
    - (A) **In general—** An issue shall be treated as meeting the requirements of this paragraph only if an amount equal to the sum of—
      - (i) the excess of—
        - (I) the amount earned on all nonpurpose investments (other than investments attributable to an excess described in this clause), over
        - (II) the amount which would have been earned if such investments were invested at a rate equal to the yield on the issue, plus
      - (ii) any income attributable to the excess described in [clause (i)](#g-3-A-i),

      is paid or credited to the mortgagors as rapidly as may be practicable.

    - (B) **Investment gains and losses—** For purposes of [subparagraph (A)](#g-3-A), in determining the amount earned on all nonpurpose investments, any gain or loss on the [disposition](/usc/26/424.md?p=c-1) of such investments shall be taken into account.
    - (C) **Reduction where issuer does not use full 1.125 percentage points under paragraph (2)—**
      - (i) **In general—** The amount required to be paid or credited to mortgagors under [subparagraph (A)](#g-3-A) (determined under this paragraph without regard to this subparagraph) shall be reduced by the unused [paragraph (2)](#g-2) amount.
      - (ii) **Unused paragraph (2) amount—** For purposes of [clause (i)](#g-3-C-i), the unused [paragraph (2)](#g-2) amount is the amount which (if it were treated as an [interest](/usc/26/856.md?p=f-1) payment made by mortgagors) would result in the excess referred to in [paragraph (2)(A)](#g-2-A) being equal to 1.125 percentage points. Such amount shall be fixed and determined as of the yield [determination](/usc/26/1313.md?p=a) date.
    - (D) **Election to pay United States—** [Subparagraph (A)](#g-3-A) shall be satisfied with respect to any issue if the issuer elects before issuing the [bonds](/usc/26/150.md?p=a-1) to pay over to the [United States](/usc/26/993.md?p=g)—
      - (i) not less frequently than once each 5 years after the date of issue, an amount equal to 90 percent of the aggregate amount which would be required to be paid or credited to mortgagors under [subparagraph (A)](#g-3-A) (and not theretofore paid to the [United States](/usc/26/993.md?p=g)), and
      - (ii) not later than 60 days after the redemption of the last [bond](/usc/26/150.md?p=a-1), 100 percent of such aggregate amount not theretofore paid to the [United States](/usc/26/993.md?p=g).
    - (E) **Simplified accounting—** The Secretary shall permit any simplified system of accounting for purposes of this paragraph which the issuer establishes to the satisfaction of the Secretary will assure that the purposes of this paragraph are carried out.
    - (F) **Nonpurpose investment—** For purposes of this paragraph, the term “nonpurpose investment” has the meaning given such term by [section 148(f)(6)(A)](/usc/26/148.md?p=f-6-A).
- (h) **Portion of loans required to be placed in targeted areas—**
  - (1) **In general—** An issue meets the requirements of this subsection only if at least 20 percent of the proceeds of the issue which are devoted to providing owner-financing is made available (with reasonable diligence) for owner-financing of targeted area residences for at least 1 year after the date on which owner-financing is first made available with respect to targeted area residences.
  - (2) **Limitation—** Nothing in [paragraph (1)](#h-1) shall be treated as requiring the making available of an amount which exceeds 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences located in targeted areas within the jurisdiction of the issuing authority.
- (i) **Other requirements—**
  - (1) **Mortgages must be new mortgages—**
    - (A) **In general—** An issue meets the requirements of this subsection only if no part of the proceeds of such issue is used to acquire or replace existing mortgages.
    - (B) **Exceptions—** Under regulations prescribed by the Secretary, the replacement of—
      - (i) construction period loans,
      - (ii) bridge loans or similar temporary initial financing, and
      - (iii) in the case of a qualified rehabilitation, an existing mortgage,

      shall not be treated as the acquisition or replacement of an existing mortgage for purposes of [subparagraph (A)](#i-1-A).

    - (C) **Exception for certain contract for deed agreements—**
      - (i) **In general—** In the case of land possessed under a [contract](/usc/26/101.md?p=f-3-A) for deed by a mortgagor—
        - (I) whose principal residence (within the meaning of [section 121](/usc/26/121.md)) is located on such land, and
        - (II) whose family income (as defined in [subsection (f)(2)](#f-2)) is not more than 50 percent of applicable median family income (as defined in [subsection (f)(4)](#f-4)),

      the [contract](/usc/26/101.md?p=f-3-A) for deed shall not be treated as an existing mortgage for purposes of [subparagraph (A)](#i-1-A).

      - (ii) **Contract for deed defined—** For purposes of this subparagraph, the term “[contract](/usc/26/101.md?p=f-3-A) for deed” means a seller-financed [contract](/usc/26/101.md?p=f-3-A) for the conveyance of land under which—
        - (I) legal title does not pass to the purchaser until the consideration under the [contract](/usc/26/101.md?p=f-3-A) is fully paid to the seller, and
        - (II) the seller’s remedy for nonpayment is forfeiture rather than judicial or nonjudicial foreclosure.
  - (2) **Certain requirements must be met where mortgage is assumed—** An issue meets the requirements of this subsection only if each mortgage with respect to which owner-financing has been provided under such issue may be assumed only if the requirements of subsections [(c)](#c), [(d)](#d), and [(e)](#e), and the requirements of paragraph [(1)](#f-1) or [(3)(B)](#f-3-B) of subsection (f) (whichever applies), are met with respect to such assumption.
- (j) **Targeted area residences—**
  - (1) **In general—** For purposes of this section, the term “targeted area residence” means a residence in an area which is either—
    - (A) a qualified census tract, or
    - (B) an area of chronic economic distress.
  - (2) **Qualified census tract—**
    - (A) **In general—** For purposes of [paragraph (1)](#j-1), the term “qualified census tract” means a census tract in which 70 percent or more of the families have income which is 80 percent or less of the statewide median family income.
    - (B) **Data used—** The [determination](/usc/26/1313.md?p=a) under [subparagraph (A)](#j-2-A) shall be made on the basis of the most recent decennial census for which data are available.
  - (3) **Area of chronic economic distress—**
    - (A) **In general—** For purposes of [paragraph (1)](#j-1), the term “area of chronic economic distress” means an area of chronic economic distress—
      - (i) designated by the State as meeting the standards established by the State for purposes of this subsection, and
      - (ii) the designation of which has been approved by the Secretary and the Secretary of Housing and Urban Development.
    - (B) **Criteria to be used in approving State designations—** The criteria used by the Secretary and the Secretary of Housing and Urban Development in evaluating any proposed designation of an area for purposes of this subsection shall be—
      - (i) the condition of the housing [stock](/usc/26/1504.md?p=a-4), including the age of the housing and the number of abandoned and substandard residential units,
      - (ii) the need of area residents for owner-financing under this section, as indicated by low per capita income, a high percentage of families in poverty, a high number of welfare recipients, and high unemployment rates,
      - (iii) the potential for use of owner-financing under this section to improve housing conditions in the area, and
      - (iv) the existence of a housing assistance plan which provides a displacement program and a public improvements and services program.
- (k) **Other definitions and special rules—** For purposes of this section—
  - (1) **Mortgage—** The term “mortgage” means any owner-financing.
  - (2) **Statistical area—**
    - (A) **In general—** The term “statistical area” means—
      - (i) a metropolitan statistical area, and
      - (ii) any county (or the portion thereof) which is not within a metropolitan statistical area.
    - (B) **Metropolitan statistical area—** The term “metropolitan statistical area” includes the area defined as such by the Secretary of Commerce.
    - (C) **Designation where adequate statistical information not available—** For purposes of this paragraph, if there is insufficient recent statistical information with respect to a county (or portion thereof) described in [subparagraph (A)(ii)](#k-2-A-ii), the Secretary may substitute for such county (or portion thereof) another area for which there is sufficient recent statistical information.
    - (D) **Designation where no county—** In the case of any portion of a State which is not within a county, subparagraphs [(A)(ii)](#k-2-A-ii) and [(C)](#k-2-C) shall be applied by substituting for “county” an area designated by the Secretary which is the equivalent of a county.
  - (3) **Acquisition cost—**
    - (A) **In general—** The term “acquisition cost” means the cost of acquiring the residence as a completed residential unit.
    - (B) **Exceptions—** The term “acquisition cost” does not include—
      - (i) usual and reasonable settlement or financing costs,
      - (ii) the [value](/usc/26/851.md?p=c-4) of services performed by the mortgagor or members of his family in completing the residence, and
      - (iii) the cost of land (other than land described in [subsection (i)(1)(C)(i)](#i-1-C-i)) which has been owned by the mortgagor for at least 2 years before the date on which construction of the residence begins.
    - (C) **Special rule for qualified rehabilitation loans—** In the case of a qualified rehabilitation loan, for purposes of [subsection (e)](#e), the term “acquisition cost” includes the cost of the rehabilitation.
  - (4) **Qualified home improvement loan—** The term “qualified home improvement loan” means the financing (in an amount which does not exceed $15,000)—
    - (A) of alterations, repairs, and improvements on or in connection with an existing residence by the owner thereof, but
    - (B) only of such items as substantially protect or improve the basic livability or energy efficiency of the [property](/usc/26/317.md?p=a).
  - (5) **Qualified rehabilitation loan—**
    - (A) **In general—** The term “qualified rehabilitation loan” means any owner-financing provided in connection with—
      - (i) a qualified rehabilitation, or
      - (ii) the acquisition of a residence with respect to which there has been a qualified rehabilitation,

      but only if the mortgagor to whom such financing is provided is the first resident of the residence after the completion of the rehabilitation.

    - (B) **Qualified rehabilitation—** For purposes of [subparagraph (A)](#k-5-A), the term “qualified rehabilitation” means any rehabilitation of a building if—
      - (i) there is a period of at least 20 years between the date on which the building was first used and the date on which the physical work on such rehabilitation begins,
      - (ii) in the rehabilitation process—
        - (I) 50 percent or more of the existing external walls of such building are retained in place as external walls,
        - (II) 75 percent or more of the existing external walls of such building are retained in place as internal or external walls, and
        - (III) 75 percent or more of the existing internal structural framework of such building is retained in place, and
      - (iii) the expenditures for such rehabilitation are 25 percent or more of the mortgagor’s adjusted basis in the residence.

      For purposes of [clause (iii)](#k-5-B-iii), the mortgagor’s adjusted basis shall be determined as of the completion of the rehabilitation or, if later, the date on which the mortgagor acquires the residence.

  - (6) **Determinations on actuarial basis—** All [determinations](/usc/26/1313.md?p=a) of yield, [effective interest rates](/usc/26/430.md?p=h-2-A), and amounts required to be paid or credited to mortgagors or paid to the [United States](/usc/26/993.md?p=g) under [subsection (g)](#g) shall be made on an actuarial basis taking into account the present [value](/usc/26/851.md?p=c-4) of money.
  - (7) **Single-family and owner-occupied residences include certain residences with 2 to 4 units—** Except for purposes of [subsection (h)(2)](#h-2), the terms “single-family” and “owner-occupied”, when used with respect to residences, include 2, 3, or 4 family residences—
    - (A) one unit of which is occupied by the owner of the units, and
    - (B) which were first occupied at least 5 years before the mortgage is executed.

    [Subparagraph (B)](#k-7-B) shall not apply to any 2-family residence if the residence is a targeted area residence and the family income of the mortgagor meets the requirement of [subsection (f)(3)(B)](#f-3-B).

  - (8) **Cooperative housing corporations—**
    - (A) **In general—** In the case of any cooperative housing corporation—
      - (i) each dwelling unit shall be treated as if it were actually owned by the person entitled to occupy such dwelling unit by reason of his ownership of [stock](/usc/26/1504.md?p=a-4) in the corporation, and
      - (ii) any indebtedness of the corporation allocable to the dwelling unit shall be treated as if it were indebtedness of the shareholder entitled to occupy the dwelling unit.
    - (B) **Adjustment to targeted area requirement—** In the case of any issue to provide financing to a cooperative housing corporation with respect to cooperative housing not located in a targeted area, to the extent provided in regulations, such issue may be combined with 1 or more other issues for purposes of determining whether the requirements of [subsection (h)](#h) are met.
    - (C) **Cooperative housing corporation—** The term “cooperative housing corporation” has the meaning given to such term by [section 216(b)(1)](/usc/26/216.md?p=b-1).
  - (9) **Treatment of limited equity cooperative housing—**
    - (A) **Treatment as residential rental property—** Except as provided in [subparagraph (B)](#k-9-B), for purposes of this part—
      - (i) any limited equity cooperative housing shall be treated as residential rental [property](/usc/26/317.md?p=a) and not as owner-occupied housing, and
      - (ii) [bonds](/usc/26/150.md?p=a-1) issued to provide such housing shall be subject to the same requirements and limitations as [bonds](/usc/26/150.md?p=a-1) the proceeds of which are to be used to provide qualified residential rental projects (as defined in [section 142(d)](/usc/26/142.md?p=d)).
    - (B) **Bonds subject to qualified mortgage bond termination date—** [Subparagraph (A)](#k-9-A) shall not apply to any [bond](/usc/26/150.md?p=a-1) issued after the date specified in subsection (a)(1)(B).
    - (C) **Limited equity cooperative housing—** For purposes of this paragraph, the term “limited equity cooperative housing” means any dwelling unit which a person is entitled to occupy by reason of his ownership of [stock](/usc/26/1504.md?p=a-4) in a qualified cooperative housing corporation.
    - (D) **Qualified cooperative housing corporation—** For purposes of this paragraph, the term “qualified cooperative housing corporation” means any cooperative housing corporation (as defined in [section 216(b)(1)](/usc/26/216.md?p=b-1)) if—
      - (i) the consideration paid for [stock](/usc/26/1504.md?p=a-4) held by any stockholder entitled to occupy any house or apartment in a building owned or leased by the corporation may not exceed the sum of—
        - (I) the consideration paid for such [stock](/usc/26/1504.md?p=a-4) by the first such stockholder, as adjusted by a cost-of-living adjustment determined by the Secretary,
        - (II) payments made by any stockholder for improvements to such house or apartment, and
        - (III) payments (other than amounts taken into account under subclause [(I)](#k-9-D-i-I) or [(II)](#k-9-D-i-II)) attributable to any stockholder to amortize the principal of the corporation’s indebtedness arising from the acquisition or development of real [property](/usc/26/317.md?p=a), including improvements thereof,
      - (ii) the [value](/usc/26/851.md?p=c-4) of the corporation’s assets (reduced by any corporate liabilities), to the extent such [value](/usc/26/851.md?p=c-4) exceeds the combined transfer [values](/usc/26/851.md?p=c-4) of the outstanding corporate [stock](/usc/26/1504.md?p=a-4), shall be used only for public benefit or charitable purposes, or directly to benefit the corporation itself, and shall not be used directly to benefit any stockholder, and
      - (iii) at the time of issuance of the issue, such corporation makes an election under this paragraph.
    - (E) **Effect of election—** If a cooperative housing corporation makes an election under this paragraph, [section 216](/usc/26/216.md) shall not apply with respect to such corporation (or any successor thereof) during the qualified project period (as defined in [section 142(d)(2)](/usc/26/142.md?p=d-2)).
    - (F) **Corporation must continue to be qualified cooperative—** [Subparagraph (A)(i)](#k-9-A-i) shall not apply to limited equity cooperative housing unless the cooperative housing corporation continues to be a qualified cooperative housing corporation at all times during the qualified project period (as defined in [section 142(d)(2)](/usc/26/142.md?p=d-2)).
    - (G) **Election irrevocable—** Any election under this paragraph, once made, shall be irrevocable.
  - (10) **Treatment of resale price control and subsidy lien programs—**
    - (A) **In general—** In the case of a residence which is located in a high housing cost area (as defined in [section 143(f)(5)](#f-5)), the [interest](/usc/26/856.md?p=f-1) of a [governmental unit](/usc/26/150.md?p=a-2) in such residence by reason of financing provided under any qualified program shall not be taken into account under this section (other than [subsection (m)](#m)), and the acquisition cost of the residence which is taken into account under [subsection (e)](#e) shall be such cost reduced by the amount of such financing.
    - (B) **Qualified program—** For purposes of [subparagraph (A)](#k-10-A), the term “qualified program” means any governmental program providing mortgage loans (other than 1st mortgage loans) or grants—
      - (i) which restricts (throughout the 9-year period beginning on the date the financing is provided) the resale of the residence to a purchaser qualifying under this section and to a price determined by an index that reflects less than the full amount of any appreciation in the residence’s [value](/usc/26/851.md?p=c-4), or
      - (ii) which provides for deferred or reduced [interest](/usc/26/856.md?p=f-1) payments on such financing and grants the [governmental unit](/usc/26/150.md?p=a-2) a share in the appreciation of the residence,

      but only if such financing is not provided directly or [indirectly](/usc/26/101.md?p=a-3-B) through the use of any [tax-exempt](/usc/26/150.md?p=a-6) private activity [bond](/usc/26/150.md?p=a-1).

  - (11) **Special rules for residences located in disaster areas—** In the case of a residence located in an area determined by the President to warrant assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (as in effect on the date of the enactment of the [Taxpayer](/usc/26/1313.md?p=b) Relief Act of 1997), this section shall be applied with the following [modifications](/usc/26/424.md?p=h-3) to financing provided with respect to such residence within 2 years after the date of the disaster declaration:
    - (A) [Subsection (d)](#d) (relating to 3-year requirement) shall not apply.
    - (B) Subsections [(e)](#e) and [(f)](#f) (relating to [purchase](/usc/26/1361.md?p=e-1-C) price requirement and income requirement) shall be applied as if such residence were a targeted area residence.

    The preceding sentence shall apply only with respect to [bonds](/usc/26/150.md?p=a-1) issued after May 1, 2008, and before January 1, 2010.

  - (12) **Special rules for subprime refinancings—**
    - (A) **In general—** Notwithstanding the requirements of [subsection (i)(1)](#i-1), the proceeds of a [qualified mortgage](/usc/26/860G.md?p=a-3) issue may be used to refinance a mortgage on a residence which was originally financed by the mortgagor through a qualified subprime loan.
    - (B) **Special rules—** In applying [subparagraph (A)](#k-12-A) to any refinancing—
      - (i) [subsection (a)(2)(D)(i)](#a-2-D-i) shall be applied by substituting “12-month period” for “42-month period” each place it appears,
      - (ii) [subsection (d)](#d) (relating to 3-year requirement) shall not apply, and
      - (iii) [subsection (e)](#e) (relating to [purchase](/usc/26/1361.md?p=e-1-C) price requirement) shall be applied by using the market [value](/usc/26/851.md?p=c-4) of the residence at the time of refinancing in lieu of the acquisition cost.
    - (C) **Qualified subprime loan—** The term “qualified subprime loan” means an adjustable rate single-family residential mortgage loan made after December 31, 2001, and before January 1, 2008, that the [bond](/usc/26/150.md?p=a-1) issuer determines would be reasonably likely to cause financial hardship to the borrower if not refinanced.
    - (D) **Termination—** This paragraph shall not apply to any [bonds](/usc/26/150.md?p=a-1) issued after December 31, 2010.
  - (13) **Special rules for residences destroyed in federally declared disasters—**
    - (A) **Principal residence destroyed—** At the election of the [taxpayer](/usc/26/1313.md?p=b), if the principal residence (within the meaning of [section 121](/usc/26/121.md)) of such [taxpayer](/usc/26/1313.md?p=b) is—
      - (i) rendered unsafe for use as a residence by reason of a federally declared disaster occurring before January 1, 2010, or
      - (ii) demolished or relocated by reason of an order of the government of a State or political subdivision thereof on account of a federally declared disaster occurring before such date,

      then, for the 2-year period beginning on the date of the disaster declaration, [subsection (d)(1)](#d-1) shall not apply with respect to such [taxpayer](/usc/26/1313.md?p=b) and [subsection (e)](#e) shall be applied by substituting “110” for “90” in [paragraph (1)](#k-1) thereof.

    - (B) **Principal residence damaged—**
      - (i) **In general—** At the election of the [taxpayer](/usc/26/1313.md?p=b), if the principal residence (within the meaning of [section 121](/usc/26/121.md)) of such [taxpayer](/usc/26/1313.md?p=b) was damaged as the result of a federally declared disaster occurring before January 1, 2010, any owner-financing provided in connection with the repair or reconstruction of such residence shall be treated as a qualified rehabilitation loan.
      - (ii) **Limitation—** The aggregate owner-financing to which [clause (i)](#k-13-B-i) applies shall not exceed the lesser of—
        - (I) the cost of such repair or reconstruction, or
        - (II) $150,000.
    - (C) **Federally declared disaster—** For purposes of this paragraph, the term “federally declared disaster” has the meaning given such term by [section 165(h)(3)(C)(i)](/usc/26/165.md).[^1]
    - (D) **Election; denial of double benefit—**
      - (i) **Election—** An election under this paragraph may not be revoked except with the consent of the Secretary.
      - (ii) **Denial of double benefit—** If a [taxpayer](/usc/26/1313.md?p=b) elects the application of this paragraph, [paragraph (11)](#k-11) shall not apply with respect to the [purchase](/usc/26/1361.md?p=e-1-C) or financing of any residence by such [taxpayer](/usc/26/1313.md?p=b).
- (l) **Additional requirements for qualified veterans’ mortgage bonds—** An issue meets the requirements of this subsection only if it meets the requirements of paragraphs [(1)](#l-1), [(2)](#l-2), and [(3)](#l-3).
  - (1) **Veterans to whom financing may be provided—** An issue meets the requirements of this paragraph only if each mortgagor to whom financing is provided under the issue is a qualified veteran.
  - (2) **Requirement that State program be in effect before June 22, 1984—** An issue meets the requirements of this paragraph only if it is a general obligation of a State which issued qualified veterans’ mortgage [bonds](/usc/26/150.md?p=a-1) before June 22, 1984.
  - (3) **Volume limitation—**
    - (A) **In general—** An issue meets the requirements of this paragraph only if the aggregate amount of [bonds](/usc/26/150.md?p=a-1) issued pursuant thereto (when added to the aggregate amount of qualified veterans’ mortgage [bonds](/usc/26/150.md?p=a-1) previously issued by the State during the calendar year) does not exceed the State veterans limit for such calendar year.
    - (B) **State veterans limit—**
      - (i) **In general—** In the case of any State to which [clause (ii)](#l-3-B-ii) does not apply, the State veterans limit for any calendar year is the amount equal to—
        - (I) the aggregate amount of qualified veterans [bonds](/usc/26/150.md?p=a-1) issued by such State during the period beginning on January 1, 1979, and ending on June 22, 1984 (not including the amount of any qualified veterans [bond](/usc/26/150.md?p=a-1) issued by such State during the calendar year (or portion thereof) in such period for which the amount of such [bonds](/usc/26/150.md?p=a-1) so issued was the lowest), divided by
        - (II) the number (not to exceed 5) of calendar years after 1979 and before 1985 during which the State issued qualified veterans [bonds](/usc/26/150.md?p=a-1) (determined by only taking into account [bonds](/usc/26/150.md?p=a-1) issued on or before June 22, 1984).
      - (ii) **Alaska, Oregon, and Wisconsin—** In the case of the following States, the State veterans limit for any calendar year is the amount equal to—
        - (I) $100,000,000 for the State of Alaska,
        - (II) $100,000,000 for the State of Oregon, and
        - (III) $100,000,000 for the State of Wisconsin.
      - (iii) **Phasein—** In the case of calendar years beginning before 2010, [clause (ii)](#l-3-B-ii) shall be applied by substituting for each of the dollar amounts therein an amount equal to the [applicable percentage](/usc/26/414.md?p=l-2-B) of such dollar amount. For purposes of the preceding sentence, the [applicable percentage](/usc/26/414.md?p=l-2-B) shall be determined in accordance with the following table:

        |  | For Calendar Year: | [Applicable percentage](/usc/26/414.md?p=l-2-B) is: |
        | --- | --- | --- |
        |  | 2006 | 20 percent |
        |  | 2007 | 40 percent |
        |  | 2008 | 60 percent |
        |  | 2009 | 80 percent. |

    - (C) **Treatment of refunding issues—**
      - (i) **In general—** For purposes of [subparagraph (A)](#l-3-A), the term “qualified veterans’ mortgage [bond](/usc/26/150.md?p=a-1)” shall not include any [bond](/usc/26/150.md?p=a-1) issued to refund another [bond](/usc/26/150.md?p=a-1) but only if the maturity date of the refunding [bond](/usc/26/150.md?p=a-1) is not later than the later of—
        - (I) the maturity date of the [bond](/usc/26/150.md?p=a-1) to be refunded, or
        - (II) the date 32 years after the date on which the refunded [bond](/usc/26/150.md?p=a-1) was issued (or in the case of a series of refundings, the date on which the original [bond](/usc/26/150.md?p=a-1) was issued).

      The preceding sentence shall apply only to the extent that the amount of the refunding [bond](/usc/26/150.md?p=a-1) does not exceed the outstanding amount of the refunded [bond](/usc/26/150.md?p=a-1).

      - (ii) **Exception for advance refunding—** [Clause (i)](#l-3-C-i) shall not apply to any [bond](/usc/26/150.md?p=a-1) issued to advance refund another [bond](/usc/26/150.md?p=a-1).
  - (4) **Qualified veteran—** For purposes of this subsection, the term “qualified veteran” means any veteran who—
    - (A) served on active duty, and
    - (B) applied for the financing before the date 25 years after the last date on which such veteran left active service.
  - (5) **Special rule for certain short-term bonds—** In the case of any [bond](/usc/26/150.md?p=a-1)—
    - (A) which has a term of 1 year or less,
    - (B) which is authorized to be issued under O.R.S. 407.435 (as in effect on the date of the enactment of this subsection), to provide financing for [property](/usc/26/317.md?p=a) taxes, and
    - (C) which is redeemed at the end of such term,

    the amount taken into account under this subsection with respect to such [bond](/usc/26/150.md?p=a-1) shall be <sup>1</sup>⁄<sub>15</sub> of its principal amount.

- (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](/usc/26/1313.md?p=b) disposes of an [interest](/usc/26/856.md?p=f-1) in a residence with respect to which there is or was any federally-subsidized indebtedness for the payment of which the [taxpayer](/usc/26/1313.md?p=b) was liable in whole or part, then the [taxpayer](/usc/26/1313.md?p=b)’s tax imposed by this chapter for such taxable year shall be increased by the lesser of—
    - (A) the recapture amount with respect to such indebtedness, or
    - (B) 50 percent of the gain (if any) on the [disposition](/usc/26/424.md?p=c-1) of such [interest](/usc/26/856.md?p=f-1).
  - (2) **Exceptions—** [Paragraph (1)](#m-1) shall not apply to—
    - (A) any [disposition](/usc/26/424.md?p=c-1) by reason of death, and
    - (B) any [disposition](/usc/26/424.md?p=c-1) which is more than 9 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](/usc/26/150.md?p=a-6) [qualified mortgage](/usc/26/860G.md?p=a-3) [bond](/usc/26/150.md?p=a-1), or
      - (ii) any credit was allowed under [section 25](/usc/26/25.md) (relating to [interest](/usc/26/856.md?p=f-1) on certain home mortgages) to the [taxpayer](/usc/26/1313.md?p=b) for [interest](/usc/26/856.md?p=f-1) 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)](#k-4)).
  - (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,
      - (ii) the holding period percentage, and
      - (iii) the income 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](/usc/26/1313.md?p=b) was liable.
    - (C) **Holding period percentage—**
      - (i) **In general—** The term “holding period percentage” means the percentage determined in accordance with the following table:

        |  | If the [disposition](/usc/26/424.md?p=c-1) occurs during a year after the testing date which is: | The holding period percentage is: |
        | --- | --- | --- |
        |  | The 1st such year | 20 |
        |  | The 2d such year | 40 |
        |  | The 3d such year | 60 |
        |  | The 4th such year | 80 |
        |  | The 5th such year | 100 |
        |  | The 6th such year | 80 |
        |  | The 7th such year | 60 |
        |  | The 8th such year | 40 |
        |  | The 9th such year | 20. |

      - (ii) **Retirements of indebtedness—** 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](/usc/26/1313.md?p=b) disposed of his [interest](/usc/26/856.md?p=f-1) 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](/usc/26/1313.md?p=b) is liable in whole or part for payment of the indebtedness.
    - (E) **Income percentage—** The term “income percentage” means the percentage (but not greater than 100 percent) which—
      - (i) the excess of—
        - (I) the modified [adjusted gross income](/usc/26/62.md?p=a) of the [taxpayer](/usc/26/1313.md?p=b) for the taxable year in which the [disposition](/usc/26/424.md?p=c-1) occurs, over
        - (II) the adjusted qualifying income for such taxable year, bears to
      - (ii) $5,000.

      The percentage determined under the preceding sentence shall be rounded to the nearest whole percentage point (or, if it includes a half of a percentage point, shall be increased to the nearest whole percentage point).

  - (5) **Adjusted qualifying income; modified adjusted gross income—**
    - (A) **Adjusted qualifying income—** For purposes of [paragraph (4)](#m-4), the term “adjusted qualifying income” means the product of—
      - (i) the highest family income which (as of the date the financing was provided) would have met the requirements of [subsection (f)](#f) with respect to the residents, and
      - (ii) 1.05 to the nth power where “n” equals the number of full years during the period beginning on the date the financing was provided and ending on the date of the [disposition](/usc/26/424.md?p=c-1).

      For purposes of [clause (i)](#m-5-A-i), highest family income shall be determined without regard to [subsection (f)(3)(A)](#f-3-A) and on the basis of the number of members of the [taxpayer](/usc/26/1313.md?p=b)’s family as of the date of the [disposition](/usc/26/424.md?p=c-1).

    - (B) **Modified adjusted gross income—** For purposes of [paragraph (4)](#m-4), the term “modified [adjusted gross income](/usc/26/62.md?p=a)” means [adjusted gross income](/usc/26/62.md?p=a)—
      - (i) increased by the amount of [interest](/usc/26/856.md?p=f-1) received or accrued by the [taxpayer](/usc/26/1313.md?p=b) during the taxable year which is excluded from gross income under [section 103](/usc/26/103.md), and
      - (ii) decreased by the amount of gain (if any) included in gross income of the [taxpayer](/usc/26/1313.md?p=b) by reason of the [disposition](/usc/26/424.md?p=c-1) to which this subsection applies.
  - (6) **Special rules relating to limitation on recapture amount based on gain realized—**
    - (A) **In general—** For purposes of [paragraph (1)](#m-1), gain shall be taken into account whether or not recognized, and the adjusted basis of the [taxpayer](/usc/26/1313.md?p=b)’s [interest](/usc/26/856.md?p=f-1) in the residence shall be determined without regard to sections [1033(b)](/usc/26/1033.md?p=b) and [1034(e)](/usc/26/1034.md) (as in effect on the day before the date of the enactment of the [Taxpayer](/usc/26/1313.md?p=b) Relief Act of 1997) for purposes of determining gain.
    - (B) **Dispositions other than sales, exchanges, and involuntary conversions—** In the case of a [disposition](/usc/26/424.md?p=c-1) other than a sale, exchange, or involuntary conversion, gain shall be determined as if the [interest](/usc/26/856.md?p=f-1) had been sold for its fair market [value](/usc/26/851.md?p=c-4).
    - (C) **Involuntary conversions resulting from casualties—** In the case of [property](/usc/26/317.md?p=a) 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)](#m-1) shall not apply to such conversion if the [taxpayer](/usc/26/1313.md?p=b) [purchases](/usc/26/1361.md?p=e-1-C) (during the period specified in [section 1033(a)(2)(B)](/usc/26/1033.md?p=a-2-B)) [property](/usc/26/317.md?p=a) for use as his principal residence on the site of the converted [property](/usc/26/317.md?p=a). For purposes of [subparagraph (A)](#m-6-A), the adjusted basis of the [taxpayer](/usc/26/1313.md?p=b) 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
    - (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 adjusted qualifying income (as defined in [paragraph (5)](#m-5)) for each category of family size for each year of the 9-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](/usc/26/317.md?p=a) 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)](#m-8-C) and in regulations prescribed by the Secretary, if 2 or more persons hold [interests](/usc/26/856.md?p=f-1) 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](/usc/26/856.md?p=f-1) in the residence.
    - (C) **Transfers to spouses and former spouses—** [Paragraph (1)](#m-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](/usc/26/424.md?p=c-1) of partial [interests](/usc/26/856.md?p=f-1) in a residence.

## Footnotes

[^1]: See References in Text note below.

## Source credit

(Added Pub. L. 99–514, title XIII, § 1301(b), Oct. 22, 1986, 100 Stat. 2610; amended Pub. L. 100–647, title I, § 1013(a)(2), (3), title IV, § 4005(a)(1), (b)–(d)(1), (e)–(g)(2), (6), Nov. 10, 1988, 102 Stat. 3537, 3645–3651; Pub. L. 101–239, title VII, § 7104(a), Dec. 19, 1989, 103 Stat. 2305; Pub. L. 101–508, title XI, § 11408(a), (c), Nov. 5, 1990, 104 Stat. 1388–477; Pub. L. 102–227, title I, § 108(a), Dec. 11, 1991, 105 Stat. 1688; Pub. L. 103–66, title XIII, § 13141(a), (c)–(e), Aug. 10, 1993, 107 Stat. 436, 437; Pub. L. 104–188, title I, §§ 1702(d)(2), 1703(n)(3), Aug. 20, 1996, 110 Stat. 1870, 1877; Pub. L. 105–34, title III, § 312(d)(1), (3), title IX, § 914, Aug. 5, 1997, 111 Stat. 839, 840, 878; Pub. L. 109–222, title II, § 203(a)(1), (b)(1), May 17, 2006, 120 Stat. 348, 349; Pub. L. 109–432, div. A, title IV, §§ 411(a), 416(a), Dec. 20, 2006, 120 Stat. 2963, 2965; Pub. L. 110–245, title I, § 103(a)–(c), June 17, 2008, 122 Stat. 1625; Pub. L. 110–289, div. C, title I, §§ 3021(b)(1), 3026(a), July 30, 2008, 122 Stat. 2893, 2897; Pub. L. 110–343, div. C, title VII, § 709(a), Oct. 3, 2008, 122 Stat. 3925; Pub. L. 113–295, div. A, title II, § 211(c)(2), Dec. 19, 2014, 128 Stat. 4033.)

## Notes

### Editorial Notes

### References in Text

The date of the enactment of this subparagraph, referred to in subsec. (d)(2)(D), is the date of enactment of Pub. L. 109–432, which was approved Dec. 20, 2006.

Section 8 of the United States Housing Act of 1937, referred to in subsec. (f)(2), is classified to section 1437f of Title 42, The Public Health and Welfare.

The Robert T. Stafford Disaster Relief and Emergency Assistance Act, referred to in subsec. (k)(11), is Pub. L. 93–288, May 22, 1974, 88 Stat. 143, as in effect on the date of enactment of Pub. L. 105–34, which was approved Aug. 5, 1997. The Act is classified principally to chapter 68 (§ 5121 et seq.) of Title 42, The Public Health and Welfare. For complete classification of this Act to the Code, see Short Title note set out under section 5121 of Title 42 and Tables.

Par. (3) of section 165(h), referred to in subsec. (k)(13)(C), was repealed by Pub. L. 113–295, div. A, title II, § 221(a)(27)(A), Dec. 19, 2014, 128 Stat. 4040. However, the term “federally declared disaster” is defined elsewhere in that section.

The date of the enactment of this subsection, referred to in subsec. (l)(5)(B), is the date of enactment of Pub. L. 99–514, which was approved Oct. 22, 1986.

Section 1034(e) (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997), referred to in subsec. (m)(6)(A), means section 1034(e) of this title as in effect on the day before the date of enactment of Pub. L. 105–34, which was approved Aug. 5, 1997. Section 1034 was repealed by Pub. L. 105–34, title III, § 312(b), Aug. 5, 1997, 111 Stat. 839.

### Prior Provisions

A prior section 143, acts Aug. 16, 1954, ch. 736, 68A Stat. 41; Dec. 30, 1969, Pub. L. 91–172, title VIII, § 802(b), 83 Stat. 677; Oct. 4, 1976, Pub. L. 94–455, title XIX, § 1901(a)(22), 90 Stat. 1767; May 23, 1977, Pub. L. 95–30, title I, § 101(d)(4), 91 Stat. 133; July 18, 1984, Pub. L. 98–369, div. A, title IV, § 423(c)(1), 98 Stat. 800, related to determination of marital status, prior to the general revision of this part by Pub. L. 99–514. See section 7703 of this title.

Provisions similar to this section were contained in section 103A of this title prior to repeal by Pub. L. 99–514.

### Amendments

2014—Subsec. (k)(12), (13). Pub. L. 113–295 redesignated par. (12), relating to special rules for residences destroyed in federally declared disasters, as (13).

2008—Subsec. (d)(2)(D). Pub. L. 110–245, § 103(a), struck out “and before January 1, 2008” after “enactment of this subparagraph”.

Subsec. (k)(11). Pub. L. 110–289, § 3026(a), substituted “May 1, 2008” for “December 31, 1996” and “January 1, 2010” for “January 1, 1999” in concluding provisions.

Subsec. (k)(12). Pub. L. 110–343 added par. (12) relating to special rules for residences destroyed in federally declared disasters.

Pub. L. 110–289, § 3021(b)(1), added par. (12) relating to special rules for subprime refinancings.

Subsec. (l)(3)(B)(ii). Pub. L. 110–245, § 103(b), substituted “$100,000,000” for “$25,000,000” wherever appearing.

Subsec. (l)(4). Pub. L. 110–245, § 103(c), reenacted heading without change and amended text generally. Prior to amendment, par. (4) defined “qualified veteran” differently with respect to different States.

2006—Subsec. (d)(2)(D). Pub. L. 109–432, § 416(a), added subpar. (D).

Subsec. (l)(3)(B). Pub. L. 109–222, § 203(b)(1), reenacted heading without change, substituted introductory provisions of cl. (i) for “A State veterans limit for any calendar year is the amount equal to—” and inserted heading, redesignated former cls. (i) and (ii) as subcls. (I) and (II), respectively, of cl. (i) and adjusted margins, and added cls. (ii) to (iv).

Subsec. (l)(3)(B)(iv). Pub. L. 109–432, § 411(a), struck out heading and text of cl. (iv). Text read as follows: “The State veterans limit for the States specified in clause (ii) for any calendar year after 2010 is zero.”

Subsec. (l)(4). Pub. L. 109–222, § 203(a)(1), amended par. (4) generally. Prior to amendment, par. (4) defined the term “qualified veteran”.

1997—Subsec. (i)(1)(C)(i)(I). Pub. L. 105–34, § 312(d)(1), substituted “section 121” for “section 1034”.

Subsec. (k)(11). Pub. L. 105–34, § 914, added par. (11).

Subsec. (m)(6)(A). Pub. L. 105–34, § 312(d)(3), inserted “(as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997)” after “1034(e)”.

1996—Subsec. (d)(2)(C). Pub. L. 104–188, § 1703(n)(3), substituted “thereon,” for “thereon.”

Subsec. (m)(4)(C)(ii). Pub. L. 104–188, § 1702(d)(2), substituted “any year of the 4-year period” for “any month of the 10-year period”, “succeeding years” for “succeeding months”, and “to zero over the succeeding 5 years” for “over the remainder of such period (or, if lesser, over 5 years)”.

1993—Subsec. (a)(1). Pub. L. 103–66, § 13141(a), amended heading and text of par. (1) generally. Prior to amendment, text read as follows:

“(A) In general.—For purposes of this title, the term ‘qualified mortgage bond’ means a bond which is issued as part of a qualified mortgage issue.

“(B) Termination on June 30, 1992.—No bond issued after June 30, 1992, may be treated as a qualified mortgage bond.”

Subsec. (d)(2)(C). Pub. L. 103–66, § 13141(d)(1), added subpar. (C).

Subsec. (i)(1)(C). Pub. L. 103–66, § 13141(d)(2), added subpar. (C).

Subsec. (k)(3)(B)(iii). Pub. L. 103–66, § 13141(d)(3), inserted “(other than land described in subsection (i)(1)(C)(i))” after “cost of land”.

Subsec. (k)(7). Pub. L. 103–66, § 13141(e), inserted at end “Subparagraph (B) shall not apply to any 2-family residence if the residence is a targeted area residence and the family income of the mortgagor meets the requirement of subsection (f)(3)(B).”

Subsec. (k)(10). Pub. L. 103–66, § 13141(c), added par. (10).

1991—Subsec. (a)(1)(B). Pub. L. 102–227 substituted “June 30, 1992” for “December 31, 1991” in heading and text.

1990—Subsec. (a)(1)(B). Pub. L. 101–508, § 11408(a), substituted “December 31, 1991” for “September 30, 1990” in heading and text.

Subsec. (m)(1). Pub. L. 101–508, § 11408(c)(3)(A), substituted “increased by the lesser of—” and subpars. (A) and (B) for “increased by the recapture amount with respect to such indebtedness.”

Subsec. (m)(2)(B). Pub. L. 101–508, § 11408(c)(1)(C), substituted “9 years” for “10 years”.

Subsec. (m)(4)(A)(iii). Pub. L. 101–508, § 11408(c)(2)(A), added cl. (iii).

Subsec. (m)(4)(C)(i). Pub. L. 101–508, § 11408(c)(1)(A), substituted heading for one which read: “Dispositions during 1st 5 years” and amended text generally. Prior to amendment, text read as follows: “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.”

Subsec. (m)(4)(C)(ii), (iii). Pub. L. 101–508, § 11408(c)(1)(B), redesignated cl. (iii) as (ii) and struck out former cl. (ii) “Dispositions during 2d 5 years” which read as follows: “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.”

Subsec. (m)(4)(E). Pub. L. 101–508, § 11408(c)(2)(B), added subpar. (E).

Subsec. (m)(5). Pub. L. 101–508, § 11408(c)(2)(C)(i), added heading and struck out former heading which read: “Reduction of recapture amount if taxpayer meets certain income limitations”.

Subsec. (m)(5)(A). Pub. L. 101–508, § 11408(c)(2)(C)(i), added subpar. (A) and struck out former subpar. (A) “In general” which read as follows: “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.”

Subsec. (m)(5)(B), (C). Pub. L. 101–508, § 11408(c)(2)(C), redesignated subpar. (C) as (B), substituted “paragraph (4)” for “this paragraph” in introductory provisions, and struck out former subpar. (B) “Adjusted qualifying income” which read as follows: “For purposes of this paragraph, the term ‘adjusted qualifying income’ means the amount equal to the sum of—

“(i) $5,000, plus

“(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 (f)(3)(A) and on the basis of the number of members of the taxpayer’s family as of the date of the disposition.”

Subsec. (m)(6). Pub. L. 101–508, § 11408(c)(3)(B)(i), substituted “Special rules relating to limitation” for “Limitation” in heading.

Subsec. (m)(6)(A). Pub. L. 101–508, § 11408(c)(3)(B)(ii), (iii), struck out at beginning “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.” and substituted “paragraph (1)” for “the preceding sentence”.

Subsec. (m)(7)(B)(ii). Pub. L. 101–508, § 11408(c)(3)(C), amended cl. (ii) generally. Prior to amendment, cl. (ii) read as follows: “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.”

1989—Subsec. (a)(1)(B). Pub. L. 101–239 substituted “September 30, 1990” for “December 31, 1989” in heading and in text.

1988—Subsec. (a)(1)(B). Pub. L. 100–647, § 4005(a)(1), substituted “1989” for “1988” in heading and in text.

Subsec. (a)(2)(A). Pub. L. 100–647, § 4005(f), inserted sentence at end relating to application of cl. (iv).

Subsec. (a)(2)(A)(ii). Pub. L. 100–647, § 4005(g)(1), substituted “(i), and (m)(7)” for “and (i)”.

Subsec. (a)(2)(A)(iii). Pub. L. 100–647, § 1013(a)(2), substituted “such issue does not meet” for “no bond which is part of such issue meets”.

Subsec. (a)(2)(A)(iv). Pub. L. 100–647, § 4005(f), added cl. (iv).

Subsec. (a)(2)(C). Pub. L. 100–647, § 4005(g)(2)(B), substituted “, (h), and (m)(7)” for “and (h)” in introductory text.

Subsec. (a)(2)(D). Pub. L. 100–647, § 4005(e), added subpar. (D).

Subsec. (b)(4). Pub. L. 100–647, § 1013(a)(3), inserted “is part of an issue which” after “which”.

Subsec. (f)(5). Pub. L. 100–647, § 4005(b), added par. (5).

Subsec. (f)(6). Pub. L. 100–647, § 4005(c), added par. (6).

Subsec. (g)(1). Pub. L. 100–647, § 4005(d)(1), substituted “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” for “paragraphs (2) and (3) of this subsection” and struck out “(other than subsection (f) thereof)” before period at end.

Subsec. (g)(2)(B)(iv). Pub. L. 100–647, § 4005(g)(6), inserted at end “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).”

Subsec. (m). Pub. L. 100–647, § 4005(g)(1), added subsec. (m).

### Statutory Notes and Related Subsidiaries

### Effective Date of 2014 Amendment

Pub. L. 113–295, div. A, title II, § 211(d), Dec. 19, 2014, 128 Stat. 4033, provided that: “The amendments made by this section [amending this section and sections 165, 168, 172, and 1033 of this title and provisions set out as notes under sections 56 and 897 of this title] shall take effect as if included in the provisions of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 [Pub. L. 110–343, div. C] to which they relate.”

### Effective Date of 2008 Amendment

Pub. L. 110–343, div. C, title VII, § 709(b), Oct. 3, 2008, 122 Stat. 3926, provided that: “The amendment made by subsection (a) [amending this section] shall apply to disasters occurring after December 31, 2007.”

Pub. L. 110–289, div. C, title I, § 3021(c), July 30, 2008, 122 Stat. 2893, provided that: “The amendments made by this section [amending this section and section 146 of this title] shall apply to bonds issued after the date of the enactment of this Act [July 30, 2008].”

Pub. L. 110–289, div. C, title I, § 3026(b), July 30, 2008, 122 Stat. 2897, provided that: “The amendments made by this section [amending this section] shall apply to bonds issued after May 1, 2008.”

Pub. L. 110–245, title I, § 103(d), June 17, 2008, 122 Stat. 1626, provided that: “The amendments made by this section [amending this section] shall apply to bonds issued after December 31, 2007.”

### Effective Date of 2006 Amendment

Pub. L. 109–432, div. A, title IV, § 411(b), Dec. 20, 2006, 120 Stat. 2963, provided that: “The amendment made by this section [amending this section] shall take effect as if included in section 203 [probably means 203(b)] of the Tax Increase Prevention and Reconciliation Act of 2005 [Pub. L. 109–222].”

Pub. L. 109–432, div. A, title IV, § 416(b), Dec. 20, 2006, 120 Stat. 2965, provided that: “The amendments made by this section [amending this section] shall apply to bonds issued after the date of the enactment of this Act [Dec. 20, 2006].”

Pub. L. 109–222, title II, § 203(a)(2), May 17, 2006, 120 Stat. 349, provided that: “The amendments made by this subsection [amending this section] shall apply to bonds issued on or after the date of the enactment of this Act [May 17, 2006].”

Pub. L. 109–222, title II, § 203(b)(2), May 17, 2006, 120 Stat. 350, provided that: “The amendments made by this subsection [amending this section] shall apply to allocations of State volume limit after April 5, 2006.”

### Effective Date of 1997 Amendment

Amendment by section 312(d)(1), (3) of Pub. L. 105–34 applicable to sales and exchanges after May 6, 1997, with certain exceptions, see section 312(d) of Pub. L. 105–34, set out as a note under section 121 of this title.

### Effective Date of 1996 Amendment

Amendment by section 1702(d)(2) of Pub. L. 104–188 effective, except as otherwise expressly provided, as if included in the provision of the Revenue Reconciliation Act of 1990, Pub. L. 101–508, title XI, to which such amendment relates, see section 1702(i) of Pub. L. 104–188, set out as a note under section 38 of this title.

Amendment by section 1703(n)(3) of Pub. L. 104–188 effective as if included in the provision of the Revenue Reconciliation Act of 1993, Pub. L. 103–66, §§ 13001–13444, to which such amendment relates, see section 1703(o) of Pub. L. 104–188, set out as a note under section 39 of this title.

### Effective Date of 1993 Amendment

Pub. L. 103–66, title XIII, § 13141(f)(1), Aug. 10, 1993, 107 Stat. 437, provided that: “The amendment made by subsection (a) [amending this section] shall apply to bonds issued after June 30, 1992.”

Pub. L. 103–66, title XIII, § 13141(f)(3), Aug. 10, 1993, 107 Stat. 437, provided that: “The amendments made by subsections (c) and (e) [amending this section] shall apply to qualified mortgage bonds issued and mortgage credit certificates provided on or after the date of enactment of this Act [Aug. 10, 1993].”

Pub. L. 103–66, title XIII, § 13141(f)(4), Aug. 10, 1993, 107 Stat. 437, provided that: “The amendments made by subsection (d) [amending this section] shall apply to loans originated and credit certificates provided after the date of the enactment of this Act [Aug. 10, 1993].”

### Effective Date of 1991 Amendment

Pub. L. 102–227, title I, § 108(c)(1), Dec. 11, 1991, 105 Stat. 1688, provided that: “The amendment made by subsection (a) [amending this section] shall apply to bonds issued after December 31, 1991.”

### Effective Date of 1990 Amendment

Pub. L. 101–508, title XI, § 11408(d), Nov. 5, 1990, 104 Stat. 1388–478, provided that: Bonds.—The amendment made by subsection (a) [amending this section] shall apply to bonds issued after September 30, 1990. Certificates.—The amendment made by subsection (b) [amending section 25 of this title] shall apply to elections for periods after September 30, 1990. Simplification.—The amendment made by subsection (c) [amending this section] shall take effect as if included in the amendments made by section 4005 of the Technical and Miscellaneous Revenue Act of 1988 [Pub. L. 100–647].”

### Effective Date of 1988 Amendment

Amendment by section 1013(a)(2), (3) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Pub. L. 100–647, title IV, § 4005(h), Nov. 10, 1988, 102 Stat. 3651, provided that: In general.—Except as otherwise provided in this subsection, the amendments made by this section [amending this section and sections 25, 26, 148, 6045, and 6654 of this title] shall apply to bonds issued, and nonissued bond amounts elected, after December 31, 1988. 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— the amendments made by subsections (b) and (c) [amending this section] shall apply to financing provided after the date of issuance of the refunding issue, and the amendment made by subsection (f) [amending this section] shall apply to payments (including on loans made before such date of issuance) received on or after such date of issuance. Subsection (g).— In general.—Except as provided in subparagraph (B), the amendments made by subsection (g) [amending this section and sections 25, 26, 6045, and 6654 of this title] shall apply to financing provided, and mortgage credit certificates issued, after December 31, 1990. 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 homebuilder, lender, or mortgagor if the bonds (the proceeds of which are used to provide such financing) are issued— before June 23, 1988, or before August 1, 1988, pursuant to a written application (made before July 1, 1988) for State bond volume authority.”

### Transition Rule

Pub. L. 110–245, title I, § 103(e), June 17, 2008, 122 Stat. 1626, provided that: “In the case of any bond issued after December 31, 2007, and before the date of the enactment of this Act [June 17, 2008], subparagraph (B) of section 143(l)(4) of the Internal Revenue Code of 1986, as amended by this section, shall be applied by substituting ‘30 years’ for ‘25 years’.”

### Termination Date for Obligations Treated as Qualified Mortgage Bonds Under Former Section 103A

Pub. L. 100–647, title I, § 1013(a)(27), Nov. 10, 1988, 102 Stat. 3543, provided that: “The date contained in [former] section 143(a)(1)(B) of the 1986 Code shall be treated as contained in section 103A(c)(1)(B) of the Internal Revenue Code of 1954, as in effect on the day before the date of the enactment of the Reform Act [Oct. 22, 1986], for purposes of any bond issued to refund a bond to which such [section] 103A(c)(1) applies.”

### Study of Recapture Provisions

Pub. L. 100–647, title IV, § 4005(i), Nov. 10, 1988, 102 Stat. 3651, required the Comptroller General of the United States to conduct a study of subsec. (m) of this section and alternatives to accomplish the purposes of such subsection, and submit a report to Congress by July 1, 1990.