Potential Recapture Tax

What is Recapture?

The borrower on a NIFA loan has a potential for an IRS federal recapture tax during the first 9 years of the loan.  This tax, if owed, is due in connection with the filing of their federal income tax return for the year in which the property was sold.  Your client may be subject to a recapture tax if all of the following events occur: 

  1. The home is sold within the first nine years; AND
  2. The homeowner realizes a net gain on the sale of the home; AND
  3. The homeowner’s adjusted gross income reported on their federal tax return at the time of the sale exceeds the IRS limit.

For example, if your client sells their home five years after closing for a gain but their adjusted gross income is below the applicable IRS limit, there is no recapture due.  Additionally, if they sell their home eight years after closing for a loss and their adjusted gross income exceeds the applicable IRS limit, there is no recapture tax.

The maximum recapture tax amount is 6.25% of your client's original loan amount.  Their Participating Lender will provide a Recapture Tax Notice at the time of loan application and again at closing.  They should save a copy of the Notice received at closing as it provides important information they will need down the road.  If the home is sold before the end of nine (9) years, they are responsible for completing IRS Form 8828 and including it with their federal tax return for the year the home was sold along with any recapture amount due.  For answers to questions about calculating a potential recapture tax, your clients should seek assistance from a professional tax advisor or the IRS.

For a summary of the federal recapture tax, click here.

Recapture Tax Reimbursement

NIFA understands your client's concern with this potential IRS federal recapture tax.  That's why NIFA adopted a recapture tax reimbursement policy for all loans closed on and after June 1, 2004.  To qualify for reimbursement of the amount of recapture tax paid by the borrower to the IRS, the borrower needs to submit the following information to NIFA's office no later than July 15th of the calendar year following the year in which they sold the home:

NIFA will pay the fees associated with the 4506 request to obtain a copy of the federal tax return direct from the IRS.  

Additional stipulations for reimbursement by NIFA for the amount of recapture tax paid by the borrower are:

  • The NIFA-financed mortgage loan was outstanding at the time of the sale (i.e. the NIFA loan has not been refinanced)
  • The reimbursement from NIFA will be limited to the actual amount of the recapture tax due and paid by the borrower (and will not include reimbursement for any fees, interest, expenses or penalties incurred)
  • NIFA will not calculate the amount of the recapture tax owed; the borrower should seek assistance from their personal tax advisor or the IRS

The borrower can expect the reimbursement process to take 90-120 days depending on how long it takes the IRS to send the federal tax return to NIFA. 

Since 2004, NIFA has received only 7 claims for reimbursement.