MCC - Federal Recapture Tax

Notice of Federal Recapture Tax

Buyers obtaining a Mortgage Credit Certificate (MCC) may be required to pay a Federal Recapture Tax if they sell their home within 9 years from the date of purchase.

What is the Federal Recapture Tax?

It’s a federal tax that a borrower may be required to pay from the net profit they receive from the sale of their home. If required, it would be due when they file their Federal Tax Return for the year in which they sell their home. The maximum recapture tax is 6.25% of the original principal balance of the loan or 50% of the profit made on the sale of the home, whichever is less.

Borrowers meeting every one of the following 3 provisions at the time of sale, will be subject to paying the Federal Recapture Tax:

  • 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
  • Income at the time of sale exceeds the maximum household income limit

Borrowers are not subject to recapture 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 it 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 (refinancing does not cancel the recapture tax provision, which may still apply if the home is sold within 9 years)

Borrowers more likely to pay recapture tax may have the following circumstances:

  • Are employed in a field with high growth income potential
  • Have income close to the maximum income limit at the time of purchase
  • Are purchasing a home in a high housing inflation environment
  • Are single at the time of purchase but may be married when the home is sold

If recapture tax is owed, it is not collected at the time of the sale. The Borrower must complete IRS Form 8828 and file it with their Federal Tax Return for the year the home is sold (regardless of whether the Borrower owes recapture). The IRS Form 8828 will assist the Borrower in determining if any recapture tax is owed. We always recommend consulting with a tax advisor to answer your federal tax questions.

Notice: Nevada Rural Housing Authority’s Recapture Rebate Program ended effective August 1, 2017. MCCs issued on or after this date are not eligible for a rebate.