Federal Recapture Tax
What is the Recapture Tax?
The Recapture Tax is a one-time federal tax on income that is designed to limit the benefits a taxpayer received from a federal subsidy when the taxpayer becomes less qualified for the subsidy. The benefits are therefore partially “recaptured.” If you received a Virginia Housing Mortgage Credit Certificate (or MCC), you could owe a Recapture Tax if you sell your home in less than nine years if your income goes up enough during that time so you exceed the allowable limits for the tax year in which you sell your home. That’s because the MCC program is a federal subsidy designed to assist people with low-to-moderate incomes, to help them afford a first home.
Frequently Asked Questions
Could I owe a Recapture Tax?
All three of the following must be true for you to owe any Recapture Tax:
- You’ve lived in your home for less than nine years before selling or disposing of it;
- You’ve profited from the sale of your home; and
- You’ve had a rapid, significant increase in household income since closing on your mortgage — causing you to exceed the allowable limits for the tax year in which you sell your home
How do I know if my income exceeds the allowable limits for the tax year I sell my home?
You’ll receive a chart showing the maximum allowable income limits based on the year in which you sell your home and the number of family members who live in the home at the time of sale. If your modified adjusted gross income (for the tax year in which you sell your home) is below the amount shown on this chart, you will not owe any Recapture Tax.
If I’m required to pay the Recapture Tax, when and how is it paid?
The Recapture Tax is paid as part of your federal income tax return (Form 1040) for the tax year in which you sell the home. You’ll be required to complete tax form 8828.
What is the maximum amount of Recapture Tax that I could owe?
The most you would ever pay is 6.25 percent of the original loan amount or 50 percent of the gain on the sale – whichever is less. Your tax could be much less, depending on how long you’ve lived in the home and how much your income has increased to put you over the maximum allowable limits.
If I do owe a Recapture Tax, when is the least expensive time to sell my home?
The Recapture Tax is highest if you sell during the fifth year of owning your home. The tax increases by 20 percent each year through the fifth year, and then decreases by 20 percent each year following the fifth year, so that fifth year is the peak year in terms of how much Recapture Tax you could owe. Remember, after the ninth year, no Recapture Tax is ever due, regardless of how much your income has increased.
Is the Recapture Tax due if I refinance my loan?
Refinancing alone does not trigger a Recapture Tax. However, it does not eliminate the possibility of owing the tax if you sell your home within the nine-year period after closing on your original mortgage.
Does transfer of the property as a result of divorce trigger recapture?
No. A divorce settlement is not considered a sale or transfer for purposes of the Recapture Tax. However, if the property is sold within the first nine years, the owner could still be subject to a Recapture Tax, if their income has significantly increased and they profit from the sale.
Is it worth getting an MCC, if it means I might owe a Recapture Tax when I sell my home?
For most people, the financial benefits of homeownership with an MCC far outweigh the possibility of having to pay a modest Recapture Tax when they sell their home. To better understand the federal Recapture Tax and how it may apply to you, please see your tax advisor. Virginia Housing cannot, and does not, provide tax advice.
Recapture Tax Calculator
Please see your tax advisor to find out how the federal Recapture Tax may apply to you. Virginia Housing cannot, and does not provide tax advice.
Current Recapture Chart
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