What is recapture tax? How does it affect me?
Recapture tax requires some mortgagors to repay the federal government a portion of their gain upon the sale of the home if they financed their home with a First Step loan. This provision is administered by the Internal Revenue Service (IRS). If any recapture tax is due, the mortgagor pays it to the IRS after selling the home. At the First Step loan closing, the lender provides a “Recapture Settlement Disclosure” form showing the maximum recapture tax which could be due, if any. In reality, most borrowers will not have to pay any recapture tax. For others, the amount will be minimal. In any case, the tax will never exceed one-half of the gain on the sale of the home, or 6.25% of the original mortgage, whichever is less. To owe any recapture tax at all, you must sell your home within nine years, earn significantly more income than when you bought the home, and gain from the sale. All three of these criteria must be met.
