Notice of Federal Recapture Tax

Buyers obtaining a Mortgage Credit Certificate (MCC) may be required to pay a Federal Recapture Tax if they meet every one of the following 3 provisions at the time of sale:

The home is sold within the first 9 years of the purchase date, and
A net profit is received from the sale of the home, and
Household income at the time of sale exceeds the maximum income limit (disclosed with the MCC)

Borrowers are not subject to Federal Recapture Tax in the following circumstances:

The home is transferred to a spouse, or former spouse, in connection with a divorce where no gain is included
The home is destroyed by a casualty and is repaired or replaced on its original site within 2 years after the end of the tax year when the casualty occurred
The home is sold, or otherwise disposed of, as a result of the borrower’s death
The home is refinanced – please note that refinancing does not cancel the recapture tax provision, which may still apply if the home is sold within 9 years

Borrowers are more likely to pay Federal Recapture Tax in the following circumstances:

Employed in a field with high growth income potential
Income is close to the maximum income limit at the time the home is purchased
Purchasing a home in a high housing inflation environment
Marital status may change from single at the time of purchase to married at the time the home is sold, or otherwise disposed of

If Federal Recapture Tax is owed, it is not collected at the time of the sale. The Borrower(s) must complete and file IRS Form 8828 with their Federal Tax Return for the year the home is sold, or otherwise disposed of (regardless of whether the Borrower owes Federal Recapture Tax). The IRS Form 8828 provides instructions to calculate and determine if Federal Recapture Tax is owed. Nevada Rural Housing Authority recommends consulting with a professional tax advisor to answer Federal Tax questions.

What is the Federal Recapture Tax?

It’s a Federal Tax a Borrower may be required to pay from the net profit received from the sale or disposition of their home. If required, Federal Recapture Tax is due at the time a Federal Tax Return is filed for the year in which the home is sold, or otherwise disposed of. The maximum Federal Recapture Tax is 6.25% of the original principal balance of the loan or 50% of the net profit earned on the sale of the home, whichever is less.

Notice: Nevada Rural Housing Authority’s Recapture Rebate Program ended on August 1, 2017. MCCs issued on or after August 1, 2017, are not eligible for a recapture tax rebate. For eligible MCCs, please email HAL@NVRural.org to request a rebate application.