Federal Recapture Tax

Selling Your Home Within Nine Years?

Federal Recapture Tax May Apply

In rare cases, homeowners who financed their home using the House Key State Bond Program or a Mortgage Credit Certificate may be subject to the “recapture” of this benefit. Our experience shows that very few borrowers will be affected by recapture tax.

Purchased your home using Home Advantage… no recapture tax due.
Selling after 9 years… no recapture tax due.
Selling with no gain… no recapture tax due.
Income within federal limits… no recapture tax due.

Your participating lender will provide you with a statement regarding recapture tax along with the federal income limits.

If you owe a recapture tax, it is paid on your federal tax returns (IRS Form 8828) on the year your home was sold. The amount is only a portion of the gain on the sale of your home. The maximum recapture tax is either 50% of the gain on sale or 6.25% of the original loan amount, whichever is less.

Again, you are subject to recapture tax only if all three of the following conditions apply:

Your home is sold or disposed of within 9 years of being purchased, for reasons other than your death; and
There is a capital gain on the sale of your home, and
Your household income for the year in which you sell your home exceeds federal recapture tax limits.

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What are Federal Adjusted Qualifying Income Limits for calculating Recapture Tax?

They are limits set by statute each year and annually adjusted 5% after loan closing. To determine what the income limits are that affect you, you will need to know three things:

Your household size at the time the home is sold or transferred.
The year you purchased your home.
Whether your home is in a Target Area or not. 80% of homes will not be located within a Target Area.

Can you tell me how much I will owe in Federal Recapture Tax?

The majority of our borrowers do not owe any Recapture Tax, as it is due only in rare circumstances (see other FAQs). For those who do, the recapture tax owed is a portion of the gain on the sale of your home. The maximum recapture tax is either 50% of the gain on sale or 6.25% of the original loan amount, whichever is less. You must first calculate the gain on the sale of your home (after the sale is complete) before you can calculate the tax owed.

What is the maximum recapture tax?

The maximum recapture tax is 6.25% of the original principal balance of the loan or 50% of the gain on the sale of your home whichever is less. You must first calculate the gain on the sale of your home (after the sale is complete) before you can calculate the tax owed.

What determines how much the actual recapture tax will be?

The date of the sale or transfer, your income in relation to the “Adjusted Qualifying Income” in the year of sale or transfer, and the gain from sale or transfer.

Are there advantages to selling the home later during the nine-year recapture period?

Yes. The maximum recapture amount increases during the first five years of ownership to its maximum in the fifth year. The amount then decreases 20% per year through the ninth year. If the sale occurs after the ninth year, there is no recapture tax.

What happens if the loan is assumed?

If the sale or transfer occurs within the first nine years of ownership, the original borrower pays the recapture tax, if applicable, and a new nine-year period begins for the purpose of applying a new recapture tax to the assuming purchaser if they also receive an MCC.

How does the IRS track the amount of recapture tax due?

WSHFC and it’s contractors are required to report to the IRS the name, address, and social security numbers of all recipients of MRB loans. The borrower is required to file IRS form 8828 with his/her federal income tax return for the tax year in which the home is sold or transferred.

Is recapture due if the borrower dies within the nine-year period?

No. A death transfer is not a sale or transfer for the purposes of recapture.

In the case of divorce, who is responsible for the recapture tax?

A divorce settlement is not a sale or transfer for the purposes of recapture. Whoever receives the home in the divorce settlement pays any recapture tax due as a result of a subsequent sale or transfer if within the nine-year period.

What if the home is destroyed as the result of a fire, flood, or other natural disaster?

If the home is destroyed and borrower rebuilds on the same site within two years after the year in which the insurance proceeds are received, no recapture is due at that time.

What if the loan is refinanced?

No recapture tax is due at the time of refinancing. If, after refinancing, you sell or transfer the property within the initial nine-year period you may owe a recapture tax.

How a refinancing or repayment of the loan in full affects recapture depends on when the refinancing or repayment in full occurs. If the borrower refinances or repays the loan in full within four years of the closing date of the loan and sells the home at a later date during the nine-year recapture period, the “Holding Period Percentage” used in determining the recapture tax is calculated in the manner set forth by the IRS.

Questions?

For details on how to calculate recapture tax, use IRS Form 8828 and instructions on the IRS website.

Source: Internal Revenue Service, Instructions for Form 8828 (Revised November 1998)

Federal Recapture Tax

Selling Your Home Within Nine Years?