Frequently Asked Questions

SC State Housing Homeowners

What is the Federal Recapture Tax?
It is a federal tax that some homeowners with SCSHFDA home loans may be required to pay from the net profit they receive from the sale of their home. If you have to pay a recapture tax, the amount will be due when you file your federal income tax for the year in which you sell your home. The maximum tax is limited to 6.25 percent of the original loan amount.

Will most SCSHFDA borrowers have to pay a recapture tax?
Probably not. In fact, it is likely that very few SCSHFDA borrowers will be affected by the recapture tax. You would pay no recapture tax if any of the following occur:
1. You own your home for more than nine years.
2. You do not have a “substantial increase” in your income.
3. You do not receive a net profit on the sale of your home.

Is this tax dependent on the profit I make when I sell my home?
There must be a profit before any recapture tax will be due if your income does not exceed the allowable income in the year of the sale.

If a recapture tax must be paid, all of your profit will not be taken. Under the “gain-on-sale” adjustment, the recapture amount can never exceed 50 percent of the profit from the sale of the home.

When I sell my home, how will I determine if I am subject to recapture tax, and if I am, how will I know the amount of the tax?
When you purchase your home, SCSHFDA will provide you with a notice of maximum recapture tax and method to calculate the recapture tax if your home is sold. This will help you determine your tax at the time of the sale. IRS Form 8828, Recapture of Federal Mortgage Subsidy, and Publication 551, Basis of Assets, are available from the IRS to assist you. This can be found online at www.irs.gov.

Will SCSHFDA calculate my recapture tax?
SCSHFDA cannot calculate your recapture tax, although we can supply you with a duplicate of the recapture tax notice that you received at closing.

What do you mean by a “substantial increase” in income?
Federal maximum income limits apply to the purchase of your home. Certain regulations automatically increase these maximums at the rate of 5 percent a year for recapture tax purposes. If, at the time you purchased your home, your income was near the federal maximum, annual increases would have to exceed 5 percent a year before you would be subject to any recapture tax. If your income is considerably below the federal maximum, your income would have to increase at a greater rate before you would be subject to recapture tax.

Example: Federal maximum income allowed in the year of the purchase is $36,500, and your income is $30,000. If you sell your home in year five, the allowable federal maximum income will be $44,366. Your income would have had to increase by $14,366, slightly more than 7 percent a year, for you to be subject to any recapture tax.

How can I determine if I will have to pay recapture tax?
There is no way to predict your exact recapture tax liability, if any, since it is based on your situation when you sell your home. It will depend on your income, family size and the amount of the net profit you obtain from the sale of your home.

Is there any way to reduce or minimize the amount of the recapture tax?
Yes, if you sell your property within the first year of purchase, the maximum amount of recapture tax you would pay, depending on your increase in income and net profit on the sale, equals 1.25 percent of the original mortgage amount. This percentage increases by 1.25 percent each year through year five (maximum of 6.25 percent) and then decreases by 1.25 percent each year until it is completely eliminated after year nine. This means that if you are subject to recapture tax, you can reduce or eliminate the tax altogether depending on when you sell your home.

Will recapture completely eliminate a homeowner’s profit from the sale of the home?
No. Under the gain-on-sale adjustment, the recapture amount can never exceed 50 percent of the profit from sale. For example, If the net gain on the sale were $4,200, the maximum recapture would be $2,100 ($4,200 x 50% = $2,100).

What happens if the loan is assumed?
If the sale or transfer occurs within the first nine years of ownership, the original borrower may have to pay the recapture tax, and a new nine-year period begins for the purpose of applying a new recapture tax to the assuming purchaser.

How does the IRS track the amount of recapture tax due?
The IRS tracks recapture through Social Security numbers as reported on 1099 forms issued by the title companies in the sale year. If a homeowner is required to pay recapture tax, the homeowner must report it on his or her federal income tax return. Please consult a tax accountant or financial advisor prior to preparing your return.

Is recapture tax due if the borrower dies within the nine-year period?
No. If the deceased borrower is the sole owner of the home, no recapture tax will be due. If, however, the home is owned jointly with a spouse or other person, he or she may be responsible for paying the recapture tax if the home is sold during the first nine years of ownership.

In the case of a divorce, who is responsible for recapture tax?
The person who receives the home in the divorce settlement pays the recapture tax, if any.

What if the home is destroyed by a fire, flood or other natural disaster?
If the home is destroyed and the borrower rebuilds on the same site within two years after the year that the insurance proceeds are received, no recapture tax is due.