Home Seller’s Federal Recapture Tax

The home seller’s federal recapture tax is a little known tax that can be assessed against homeowners when they sell. It can be applied who receive a loan financed with the sale of tax exempt mortgage revenue bonds or received a mortgage credit certificate. Most of these mortgage holders come from First Step type programs administered by states to encourage first time home buyers of modest means. The reason is that the buyer has received the benefit of a lower interest rate than the market offers. It probably doesn’t apply to you even if you have one of these type of loans. You should know that this tax exists. At the very least it is something you can drop into the conversation at a cocktail party to prove how nuanced your knowledge is in these matters. Why do I say it probably doesn’t apply to you? Here are some key points regarding the home seller’s federal recapture tax:

taxes (Photo credit: 401(K) 2012)

It doesn’t apply at all if you have owned your home for nine years or more.
You have to have received a substantial increase in your income since the date on which you bought the home.
You have to have received a net profit on the sale of your home after deducting your realtor’s commission, if any, any fix up expenses you may have incurred and your State tax.

You may avoid this tax, even if you have a profit, if your income does not exceed the allowable income in the year you sell.

The most home seller’s federal recapture tax anyone can ever be liable for is 6.5% of the original loan amount.It’s interesting the way it is figured. Here’s how:

If you sell your property within the first year of purchase, the maximum amount of Recapture you would pay, depending on your income and your net profit on the sale, amounts to 1.25% of the original mortgage amount. This percentage increases by 1.25% each year through year 5 when it reaches its maximum of 6.25%. From that high point it decreases by 1.25% each following year until it is completely eliminated by year nine.

This means if you are subject to the Home Seller’s Federal Recapture tax you can reduce or eliminate it altogether by timing when you sell the house.