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Recapture Tax


Montana Housing is a State Housing Finance Agency that sells tax-exempt bonds under the federal Mortgage Revenue Bond Program (MRB), creating special loans for eligible home buyers. Bond investors receive tax-free interest income. Home buyer benefits vary, but can include lower mortgage rates and help with closing costs; or a federal income tax credit under a separate program called a Mortgage Credit Certificate (MCC). The Internal Revenue Service defines these benefits as a "federal subsidy benefit‟ or "public benefit‟.  Recapture tax provisions were written into tax law by IRS and Congress to “recapture” a portion of this benefit under limited circumstances.  The operative word is portion.  Recapture tax is not intended to cancel program benefits. Recapture provisions are ONLY triggered if ALL three occur:

  • Sell the home within 9 years; AND

  • Recognize a significant gain on the sale of the home; AND

  • Have a substantial increase in income.

Limits on Recapture Tax:

The maximum recapture tax is the LESSER OF 50% of the gain on the home; OR 6.25% of the original loan amount. Also, the maximum tax is calculated on a bell curve over the 9-year period, with early and later years being lower. "Year 5" is the highest possible year.

People most likely to pay this tax:

  • Employed with high income growth potential
  • Close to the income limit at the time home is purchased
  • "Empty nester" at the time of sale
  • Live in a high inflation environment


  • $40,000     Household income when purchased
  • $90,000     Household income when sold
  • $40,000     Net profit on sale
  • $4,200       Recapture tax paid


  • Sell after 9 years.....NO recapture tax
  • Sell with no gain......NO recapture tax
  • Income within Federal Limits......NO recapture tax

Disclaimer:  This is a brief overview of complex IRS guidelines.  Homeowners are always encouraged to seek advice from their tax professional specific to their situation.

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