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IRS.gov Website
Publication 523
taxmap/pubs/p523-008.htm#en_us_publink1000200846

Recapturing (Paying Back) a Federal Mortgage Subsidy(p32)

rule
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

Loans subject to recapture rules.(p32)

rule
The recapture applies to loans that:
  1. Came from the proceeds of qualified mortgage bonds, or
  2. Were based on mortgage credit certificates.
The recapture also applies to assumptions of these loans.
taxmap/pubs/p523-008.htm#en_us_publink1000200848

Federal subsidy benefit.(p32)

rule
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

Sale or other disposition.(p32)

rule
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 or disposed of 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

When recapture applies.(p32)

rule
Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.
taxmap/pubs/p523-008.htm#en_us_publink1000200851

When recapture does not apply.(p32)

rule
Recapture does not apply in any of the following situations.
taxmap/pubs/p523-008.htm#en_us_publink1000200853

Notice of amounts.(p33)

rule
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

How to figure and report the recapture.(p33)

rule
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.