If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. taxmap/pubs/p523-008.htm#en_us_publink1000200847
The recapture applies to loans that:
- Came from the proceeds of qualified mortgage bonds, or
- Were based on mortgage credit certificates.
The recapture also applies to assumptions of these loans.
If you received a mortgage loan from the proceeds of a tax-exempt bond, you received the benefit of a lower interest rate than was customarily charged on other mortgage loans. If you received a mortgage credit certificate with your mortgage loan, you were able to reduce your federal income taxes by a mortgage interest credit. Both of these benefits are federal mortgage subsidies. taxmap/pubs/p523-008.htm#en_us_publink1000200849
The sale or other disposition of your home includes an exchange, involuntary conversion, or any other disposition.
For example, if you give away your home (other than to your spouse or ex-spouse incident to divorce), you are considered to have "sold" it. You figure your recapture tax as if you had sold your home for its fair market value on the date you gave it away. taxmap/pubs/p523-008.htm#en_us_publink1000200850
Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.
- You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan.
- Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program).
Recapture does not apply in any of the following situations.
- Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home.
- Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas.
- The home is disposed of as a result of your death.
- You dispose of the home more than 9 years after the date you closed your mortgage loan.
- You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income.
- You dispose of the home at a loss.
- Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and in the Hurricane Katrina disaster area. For more information, see Replacement Period in Publication 547.
- You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies).
At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. taxmap/pubs/p523-008.htm#en_us_publink1000200854
The recapture tax is figured on Form 8828. If you sell your home and your mortgage loan is subject to the recapture rules, you must file Form 8828 even if you do not owe a recapture tax. Attach Form 8828 to your Form 1040. For more information, see Form 8828 and its instructions.