Federal Recapture Tax
Borrowers who receive a CHFA MCCsm or a CHFA FirstStepsm could be subject to the Federal Recapture Tax on those benefits when if they sell their home. The tax is part of the federal tax code and is collected by the IRS.
When does the tax apply?
All three of the following conditions must be in effect to trigger the tax:
- The home is sold or disposed of in some other way within nine years of the original closing date.
- The borrower has a net gain on the sale of the property.
- The borrower's annual adjusted gross income exceeds the Federal Threshold Limit as prescribed by the Federal Tax Code.
When does it not apply?
You will not owe the tax if:
- You transfer the home to your spouse or to your former spouse as an agreement of divorce, and no gain or loss is included in your income as a result of the transfer.
- Your home is destroyed by a casualty and you repair it or replace it on its original site within two years after the end of the tax year when the destruction happened.
- The home is disposed of as a result of the borrower's death.
Am I likely to owe the tax?
Those borrowers most likely to owe are borrowers:
- whose income has a potential for rapid growth,
- who are close to the maximum income limit at the time of mortgage closing, or
- whose property is in a high appreciation environment.
For answers regarding questions about calculating potential tax liability, please seek assistance from a professional tax advisor.
Recapture Tax Reimbursement
Good news! Once you have paid the recapture tax, you may be eligible for reimbursement through CHFA's Recapture Tax Reimbursement Plan. The guidelines for reimbursement are:
- You filed and paid for any recapture tax owed the year the tax was due.
- You submit CHFA Form 950, Request for Recapture Tax Reimbursement.
- You must submit the request no later than December 31 of the year the recapture tax is paid. For example, if the house is sold in 2016, the tax return is filed in 2017. The reimbursement request must be submitted no later than December 31, 2017.