Indiana recapture tax: three conditions, and it peaks before it falls
Program and regulatory figures verified October 5, 2026. Details change; confirm your scenario with us.
Recapture tax frightens more Indiana buyers out of assistance than it has ever actually cost them. It is a narrow rule with three gates, and most borrowers never pass through all three.
What is federal recapture tax?
A clawback Congress attached to mortgage revenue bond financing in 1988, amended in 1990, designed to recover part of the subsidy when a borrower's circumstances improve quickly. It is federal and it is owed to the IRS, not to IHCDA. It is also entirely separate from repaying the down payment assistance itself, which happens regardless. That part is non-forgivable.
Because it travels with bond money, it lands on First Step and Step Down and not on Next Home, which is TBA funded. The STEPS matrix records Next Home as "Subject to Recapture: No".
IHCDA's guide is careful to say this is not tax advice and each borrower should consult a tax specialist. So is this page.
When is recapture actually owed?
Only when all three of these are true. Miss any one and nothing is owed.
- The property stops being your principal residence within the first full nine years after closing.
- There is a profit on the sale.
- Your household income that year exceeds the adjusted qualifying income for your family size.
IHCDA states the exemptions as plainly: sell after nine years and there is no recapture tax; sell without a gain and there is no recapture tax; stay under that year's adjusted qualifying income and there is no recapture tax.
In practice the third gate is the one that saves most people. Recapture is aimed at a borrower whose income has climbed well past the programme limit, and a household that qualified on income at purchase frequently still qualifies at sale.
How much can it be?
Capped twice. It "will never exceed the lesser of 6.25% of the original loan amount or one-half (1/2) of the gain on the sale of the home."
On a $200,000 loan, 6.25% is $12,500, and that is the ceiling before the gain test reduces it further. The actual calculation multiplies three things: your income percentage, the maximum recapture amount, and a holding-period percentage.
★ Why does exposure rise before it falls?
This is the part that surprises people, and most summaries get it wrong by describing recapture as simply decaying from day one. IHCDA publishes the actual table, and it is a hump.
| Months since closing | Holding period percentage |
|---|---|
| 1–12 | 20% |
| 13–24 | 40% |
| 25–36 | 60% |
| 37–48 | 80% |
| 49–60 | 100% |
| 61–72 | 80% |
| 73–84 | 60% |
| 85–96 | 40% |
| 97–108 | 20% |
| 109 or more | No recapture tax |
Maximum exposure sits in years four and five. Sell in year one and only 20% of the calculated amount is in play; sell at month 55 and 100% is. For a buyer weighing First Step against Next Home, the window that matters is years four to five, not the first couple.
How is the income percentage worked out?
By how far over the limit you land. If your income exceeds the applicable limit by $5,000 or more, the income percentage is 100%. If it is less than $5,000 over, you divide the excess by $5,000 and round to the nearest whole percentage.
So a household $2,500 over the limit carries a 50% income percentage, which halves the figure again. Between the three multipliers, the headline 6.25% is rarely what anyone pays.
What is exempt outright?
- Disposal of the property by reason of death.
- Transfer to a spouse or former spouse incident to a divorce, where no gain or loss is included in income.
- Refinancing the home, unless the borrower later meets the recapture rules.
- Destruction by fire, storm, flood or other casualty, if replaced on the original site within two years of the end of that tax year.
Transferring the property for less than fair market value, other than incident to a divorce, does not avoid it — the tax may be computed as though the home sold at market value.
What will I receive?
Within ninety days of final approval, IHCDA sends a Notice to Mortgagor of Maximum Recapture Tax and of Method to Compute Recapture Tax on Disposition of Home. Keep it — it carries the figures the calculation needs years later. If tax is owed it is computed and paid to the IRS for the tax year in which the home is sold, using Form 8828.
Frequently asked questions
Does Indiana down payment assistance have a recapture tax?
Federal recapture tax applies to the bond-funded First Step and Step Down programs. It does not apply to Next Home, which is TBA funded; the STEPS Lender Matrix records Next Home as not subject to recapture.When do I owe federal recapture tax in Indiana?
Only when all three conditions are true: the property stops being your principal residence within the first full nine years, there is a profit on the sale, and your household income that year exceeds the adjusted qualifying income for your family size. If any one is false, no recapture tax is due.How much is the federal recapture tax?
It never exceeds the lesser of 6.25% of the original loan amount or one half of the gain on the sale. The actual figure multiplies the income percentage, the maximum recapture amount and a holding period percentage, so most borrowers who owe anything pay well below the ceiling.Does recapture tax decrease every year?
No. IHCDA's holding period percentage rises from 20% in the first year to 100% at months 49 through 60, then falls back to zero at 109 months. Exposure peaks in years four and five rather than declining steadily from closing.Mike Certo · NMLS #260555 · Cornerstone First Mortgage NMLS #173855 · Equal Housing Lender. Educational content about financing, not a loan commitment and not legal or tax advice. IHCDA program terms, income limits and acquisition limits are set by the Indiana Housing and Community Development Authority and change; figures here carry the date we verified them against IHCDA's published documents. IHCDA down payment assistance is a non-forgivable second mortgage repayable in full, not a grant. Federal recapture tax may apply on bond-funded loans; consult a tax advisor. Loans are subject to borrower and property qualification.