IRS Recapture Tax/ Reimbursement
A Federal Recapture Tax (additional federal income tax) may be owed when a home that was financed with a NIFA mortgage is sold. The tax liability only applies to NIFA mortgages obtained on or after January 1, 1991 and is based on income, family size and net gain realized on the sale of the home. Each of the following events must occur to trigger the tax:
Some borrowers are more likely to pay a Recapture Tax than others, such as:
- The home is sold within the first nine years of the closing date; AND
- The homeowner realizes a gain on the sale of the home as defined by the IRS; AND
- The homeowner’s income has increased since closing and exceeds the limits established by the IRS.
Special rules may apply in certain circumstances. You will not owe a Recapture Tax if:
- Borrowers who are employed in a high-growth income potential position;
- Borrowers who are close to the maximum income limit at the time of the mortgage loan closing;
- Borrowers who are in a high inflation environment; or
- Single borrowers at closing that are married when the home is sold.
- You transfer the home to your spouse, or to your former spouse in connection with a divorce where no gain is included in your income;
- Your home is destroyed by a casualty and it is repaired or replaceed on its original site within two years after the end of the tax year when the destruction happened; or
- If the home is sold or otherwise disposed of as a result of the borrower’s death.
If there is a Recapture Tax, the year in which the property is sold will be used in calculating the amount of the tax. The Recapture Tax is not collected at the time of the sale but instead when filing a federal tax return for the year in which the sale occurred. The Recapture Tax is not activated if a borrower refinances the property; however, refinancing does not cancel the Recapture Tax provision. The borrower will sign a recapture tax disclosure form at the time of the initial loan application and again at closing. This disclosure form includes the information needed to assist in determining if and when any recapture tax may be due.
Regardless of whether the borrower owes a Recapture Tax upon the sale of his or her home, they must complete IRS Form 8828 and file it with their Federal Tax Return for the year the home is sold. IRS Form 8828 will assist borrowers in calculating the correct amount due, if any, to the IRS. An applicant should refer to the final recapture tax disclosure notice when completing IRS Form 8828. If a copy is needed, please contact your servicing lender. For answers to specific questions about calculating potential tax liability, seek assistance from a professional tax advisor or the IRS. Toll free numbers for the IRS are 877-829-5500 or 800-820-1040.
Reimbursement of Recaputre Tax
For all loans closed on or after June 1, 2004 and financed through the Single Family Bond Program, NIFA has taken the confusion and worry out of the recapture tax provision. NIFA will reimburse any homebuyer who sells his or her home and is required to pay the federal recapture tax.
A homebuyer seeking reimbursement will need to apply to NIFA by July 15 of the calendar year immediately following the calendar year in which the home was sold. NIFA will reimburse a homebuyer for payment of any recapture tax only if the NIFA-financed mortgage loan was outstanding at the time of sale (i.e. NIFA will not reimburse the homebuyer if the mortgage loan has been subsequently refinanced).
The reimbursement from NIFA will be limited to the actual amount of the recapture tax. (NIFA will not reimburse for any fees, interest, expenses or penalties incurred.) NIFA will not calculate the amount of the recapture tax owed by the homebuyer upon sale or disposition of the home. NIFA will pay for fees associated with the IRS Form 4506 that is required as part of the Request for Recapture Tax Reimbursement. If assistance is needed, the homebuyer will need to consult a personal tax advisor or the IRS.