Recapture Tax

[RenP]

We sold our house at the 91st month of a loan that included a mortgage credit certificate. There would have been no recapture tax at 109 or more months. According to a letter we received in our closing packet, the adjusted qualifying income disposition for us at 91 months is significantly higher than our income. Does this mean we owe no recapture tax?

[JohnS_CPA · Accepted solution]

Probably. If the adjusted qualifying income (i.e. the income limit at the time of the loan) has not grown more than 5% a year then there is no recapture.

Recapture tax is a federal IRS provision that requires homeowners who use an MCC to potentially repay the federal government a portion of the gain from sale of their home under specific, limited circumstances. For many people though, recapture tax is not owed. For the tax to apply, the homeowner must have all three of the following occur:

• Sell home within 9 years of purchase
• Have significant increase in income (more than 5% yearly above the income limits in effect when the home was bought
• Realized a gain from sale of the home