If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. The exclusion of gain provisions discussed earlier in this chapter do not apply to this recapture tax.

The recapture tax is figured on Form 8828. If you sell your home and your mortgage loan is subject to the recapture rules, you must file Form 8828 even if you do not owe a recapture tax.

Loans subject to recapture rules. The recapture of the subsidy applies to loans provided after 1990 that:

1. Came from the proceeds of qualified mortgage bonds issued after August 15, 1986, or
2. Were based on mortgage credit certificates issued after 1990.

The recapture also applies to assumptions of these loans.

If your mortgage loan is subject to this recapture rule, you should have received a notice containing information that you need to figure the recapture tax.

When the recapture applies. The recapture of the federal mortgage subsidy applies only if you meet both of the following conditions.

1. You sell or otherwise dispose of your home:
   1. At a gain, and
   2. During the first 9 years after the date you closed your mortgage loan.
2. Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program).

When recapture does not apply. The recapture does not apply if any of the following situations apply to you:

• Your mortgage loan was a qualified home improvement loan of not more than $15,000,
• The home is disposed of as a result of your death,
• You dispose of the home more than 9 years after the date you closed your mortgage loan,
• You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income,
• You dispose of the home at a loss,
• Your home is destroyed by a casualty, and you repair it or replace it on its original site within 2 years after the end of the tax year when the destruction happened, or
• You refinance your mortgage loan (unless you later meet all of the conditions listed previously under When the recapture applies).

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