Federal Recapture Tax
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.
The House
Key program uses the proceeds of tax-exempt bonds to provide first-time
homebuyers the benefit of a lower interest rate. Should the home financed using
the House Key Loan 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. The payment of recapture tax occurs at the time the property is 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:
1. Your household size at the time the home is
sold or transferred.
2. The year you purchased your home.
3. Whether your home is in a
Targeted Area or
not. 80% of homes will not be located within a Targeted Area.
View the limits
(PDF) if purchased your home in 2009 2008
2007 2006
2005
2004
2003
2002
2001
2000.
For limits prior to 2000, contact Lisa DeBrock at
lisa.debrock@wshfc.org.
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.
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.
______________________________________
For details
on how to calculate recapture tax, use
IRS Form 8828 and
instructions on the IRS
website.
Special thanks to California Housing Finance Agency. Source:
Internal Revenue Service, Instructions for Form 8828
(Revised November 1998
04/27/2009
