The Federal Recapture Tax is designed to help the IRS and the U.S. Federal Government recapture profits gained when a homeowner who gets their mortgage from the Federal Mortgage Revenue Bond sells or transfers ownership of their home. These loans are typically below market interest rate loans gotten through participating lenders in conjunction with their respective state’s housing agency.
Will I Have To Pay A Recapture Tax?
It is impossible to say at the beginning of your mortgage whether or not you will owe the IRS a Recapture Tax. What can be stated is that you could possibly owe a recapture tax in the future if you sell your home within nine years of getting your first mortgage.
There are three criteria that all must be met that would put you in a position of possibly having to pay a recapture tax.
- The first is: has your household income risen significantly since you got your first mortgage? If your household income has risen more than approximately 5% per year since you got the loan you may be subject to a recapture tax. If you have bought your home in an area that was subject to income restrictions then your income increase will be compared to the respective income limit for the area where you bought your home. The income limit will be adjusted at 5% so that it can be compared to your current income. If you income is less than the adjusted income limit then you will most likely not have to pay a recapture tax when you sell your home.
- Have you owned your home less than nine year when you sold it? If so, you may be subject to a recapture tax.
- Do you stand to gain a significant amount of money – has your home appreciated significantly since you got it – when you sell your home? If so, you may be subject to a recapture tax.
To find out exactly what recapture tax you may have to pay you should consult with a tax advisor or consult with the IRS.
How Much Will I Have To Pay For The Recapture Tax?
Again, it is difficult to say exactly what if any recapture tax you may have to pay when you sell your home or transfer its ownership. If you meet all three of the conditions above then you’re likely to have a recapture tax due to the IRS.
The recapture tax is calculated based on the original mortgage amount, the length of time you have lived in the property, and the amount of increase you have had with your income since you got your mortgage. According to the recapture tax calculation, the most costly time that you may sell your home is 5 years after you bought your home.
Please consult with your tax adviser to determine whether you will owe a recapture tax if you are planning on selling your home.
Additional Information About The IRS Recapture Tax
- If you owe a recapture tax, you need to be prepared to pay it in the tax return that is due for the year in which you sell your home. It is highly recommended that if you do not typically use a tax preparer for your annual taxes, that for the year that you sell your home that you consider using a tax preparer to ensure your taxes are figured correctly.
- Your mortgage is assumable to qualified borrowers if you have an FHA or VA loan. As such if you transfer ownership when the new home owner assumes your mortgage you may be due a recapture tax and the new home owner will have another 9 year period where they will be subject to the same recapture tax requirements as you were when you owned the home.
- You may refinance your home without having to pay a recapture tax. However, you will still be for the recapture tax period that started when you first bought your home.
- Your estate and heirs will not be responsible for paying a recapture tax on your home should you die before you reach the 9 year point.
- If you give your home away, you will still be responsible for any recapture tax due upon the ownership transfer.
- If you transfer ownership from two spouses to one spouse as the result of a divorce as long as the transfer does not result in any gain or loss to the departing spouse as calculated for federal income tax purposes.
- When you sell your home make sure that you keep your Settlement Statement, also known as – the HUD-1. You will also want to keep the Settlement Statement from when you bought the home. Both of these forms are required to calculate any recapture tax you may owe.
One last thing, the benefit to a home buyer purchasing a home through a state sponsored down payment assistance and home ownership purchase program is that they provide a significant advantage to the home buyer. These loans are designed to serve a purpose of providing home ownership opportunities for low to moderate income homebuyers.
It is likely that if you are subject to a recapture tax that this expense is far outweighed by the benefit you have received from having a lower than market interest which keeps your monthly payment down, as well as your monthly mortgage interest, and the tax deductions associated with being a home owner. In many states, at the time that you get your mortgage you should check with your state housing authority or with your bank where you got your financing to see if you qualify for a recapture tax credit. Many states offer these credits.
