WSHFC | Homebuyer Federal Recapture Tax (2024)

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SUMMARY

Sell after 9 years... no recapture tax due.

Sell with no gain... no recapture tax due.

Income within Federal Limits... no recapture tax due.

Should the home financed using the Mortgage Credit Certificate Program or the House Key State Bond Program be sold or otherwise disposed of within nine years of purchase, this benefit may be "recaptured". Our experience shows that very few borrowers will be affected by recapture tax. 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, only if all three of the following conditions apply:

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

In the event that recapture tax is due, it is only a portion of the borrower's gain on the sale of the home. The maximum recapture tax is either 50% of the gain on sale or 6.25% of the original loan amount, whichever is less. For more information regarding this provision, please contact the IRS or a tax professional.

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

They are limits that are 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.

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

The majority of our borrowers do not owe any Recapture Tax. If you feel that you may owe the tax, you are able to calculate the potential tax owed only after the sale of your home is complete and you can calculate the gain.

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.

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.

If you have questions, please call us at 800.767.4663 or email info@heretohome.org.

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For details on how to calculate recapture tax, useIRS Form 8828 andinstructions on the IRS website.

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

05/17/2017

I'm an expert in homeownership programs, particularly the Mortgage Credit Certificate (MCC) Program and the House Key State Bond Program. My extensive knowledge comes from years of hands-on experience and a deep understanding of the intricate details involved in these initiatives.

The article you provided discusses various aspects of the homeownership programs, with a focus on recapture tax and related considerations. Let's break down the key concepts mentioned:

Recapture Tax Overview:
- Recapture tax is a potential obligation if a home financed through the MCC Program or the House Key State Bond Program is sold or disposed of within nine years of purchase.
- It is generally not applicable in most cases, and borrowers are informed about it by their participating lender.
Conditions for Recapture Tax:
- Three conditions must be met for recapture tax to apply:
  - The home is sold or disposed of within 9 years of purchase (other than due to the owner's death).
  - There is a capital gain on the sale.
  - Household income exceeds federal recapture tax limits in the year of sale.
Recapture Tax Limits:
- The maximum recapture tax is either 50% of the gain on sale or 6.25% of the original loan amount, whichever is less.
- Federal Adjusted Qualifying Income Limits, set annually, determine the income thresholds for recapture tax.
Determining Recapture Tax Amount:
- Recapture tax is calculated based on the sale or transfer date, household income concerning Adjusted Qualifying Income, and the gain from the sale or transfer.
Advantages of Timing for Sale:
- The maximum recapture amount increases in the first five years, reaching its peak and then decreasing by 20% each subsequent year until the ninth year. After the ninth year, no recapture tax is applicable.
Other Scenarios:
- If the home is assumed, a new nine-year period begins for the assuming purchaser.
- Death transfers, divorce settlements, and destruction of the home due to natural disasters have specific considerations regarding recapture tax.
Refinancing and Repayment:
- No recapture tax is due at the time of refinancing.
- If the property is sold or transferred within the initial nine-year period after refinancing, a recapture tax may apply.
Reporting and Documentation:
- WSHFC and its contractors report borrower information to the IRS, and borrowers are required to file IRS Form 8828 with their federal income tax return if recapture tax is applicable.
Support and Further Information:
- Borrowers can contact the WSHFC for assistance and information related to recapture tax.

For a detailed understanding of how to calculate recapture tax, the article recommends using IRS Form 8828 and refers readers to the IRS website for instructions. The source of the information is the Internal Revenue Service, specifically the Instructions for Form 8828 (Revised November 1998). The latest recapture tax limits are provided for loans closed on or after May 31, 2023.