Recapture Agreement: Triggers, Repayment, and Exceptions

A recapture agreement is the clause built into a government benefit — a tax credit, a subsidized mortgage, a federal grant, a state incentive — that requires you to pay some or all of that benefit back if you break the conditions attached to it. The trigger, the formula, and the escape hatches differ sharply by program. Low-Income Housing Tax Credit recapture claws back the “accelerated portion” of credits already claimed plus non-deductible interest. Federal mortgage subsidy recapture is capped at 50% of your gain on the sale and disappears entirely after nine years. A Community Development Block Grant repayment is tied to the property’s current market value. Knowing which set of rules applies to your agreement is the difference between a manageable bill and a financial surprise.

Programs That Use Recapture Agreements

Recapture provisions show up wherever a public agency hands out money in exchange for long-term behavior. The heavily regulated ones fall into a short list.

Low-Income Housing Tax Credits under IRC Section 42. Investors get credits for developing affordable housing and the building has to stay affordable through a 15-year compliance period, with an extended use period typically running another 15 years beyond that.
Federal mortgage subsidies. Buyers who finance through tax-exempt qualified mortgage bonds or a mortgage credit certificate receive a below-market rate. Selling within nine years can trigger recapture under IRC Section 143(m).
Community Development Block Grants. Real property acquired or improved with more than $25,000 in CDBG funds has to keep serving eligible purposes for at least five years after the subrecipient agreement expires.¹
Conservation easements. Because the development restriction has to be permanent, a later violation can unwind the charitable deduction entirely.
State and local economic development incentives. Grants and abatements are commonly tied to job creation or capital investment targets, with repayment owed if the recipient falls short.

What Triggers Recapture

Different programs, same underlying idea: the recipient stopped delivering the public benefit the money was meant to produce.

A drop in qualified use. For LIHTC properties, recapture is triggered when the building’s “qualified basis” falls from one year to the next. In plain terms, the building is housing fewer low-income tenants than the program requires. Converting affordable units to market rate is the obvious version, but failing to properly certify tenant incomes or letting occupancy slip below the minimum set-aside produces the same result.²

Selling too early. A federally subsidized home sold within nine years of the loan runs into the recapture calculation. After nine years, the obligation is gone.³ For CDBG-funded property, using it for a purpose that fails one of the program’s national objectives during the compliance window forces repayment.

Missing performance targets. Economic development grants often require a specific number of new jobs or a minimum capital investment by a set date. Fall short and the shortfall generally produces a proportional repayment.

Breaking reporting rules. Most recapture agreements require annual certifications. Missing them, or filing inaccurate ones, can itself be the breach that starts the recapture process, even when the underlying use of the property has not changed.

How the Repayment Is Calculated

LIHTC Recapture

The LIHTC formula is the most complicated of the group. Credits are claimed over a 10-year credit period, but the compliance period runs 15 years. Because credits come in faster than they would if spread evenly over all 15 years, the recapture targets that acceleration — the “accelerated portion” is the total credits actually claimed in prior years minus what would have been claimed on a ratable 15-year schedule.²

On top of that, interest is added at the IRS overpayment rate, which was 7% per year in the first quarter of 2026, compounded daily and running from each prior year’s return due date.⁴ That interest is not deductible.

Two other features soften the number in practice. Recapture only touches credits that actually reduced tax liability; carried-forward credits get adjusted rather than converted into a payment. And the math is proportional. If a building’s qualified basis drops by 20%, recapture applies only to the credits attributable to that 20%, not to the credits for the whole building.

Federal Mortgage Subsidy Recapture

Section 143(m) uses a completely different structure. The recapture tax equals the lower of the calculated recapture amount or 50% of the gain on the sale. Sell at a loss and you owe nothing.

The recapture amount itself is the product of three figures:

Federally subsidized amount: 6.25% of the highest principal balance owed on the subsidized loan.
Holding period percentage: rising through the first five years (20%, 40%, 60%, 80%, 100%), then falling in years six through nine (80%, 60%, 40%, 20%). Exposure peaks at year five and fades to zero after year nine.
Income percentage: based on your modified adjusted gross income at sale relative to an adjusted qualifying income figure. At or below that threshold, the income percentage is zero and you owe no recapture tax regardless of the other factors.

Your bond issuer or lender should have handed you a notification table at closing listing the adjusted qualifying income figures by year and family size. You need it to complete Form 8828.⁵

Grant Recapture

Direct federal grants require returning actual dollars rather than adjusting a tax bill. For CDBG-funded real property, if the property stops meeting an eligible purpose within the compliance window, the subrecipient repays an amount equal to the property’s current market value minus any value attributable to non-CDBG investment. After the window closes, no repayment is required. Repaid CDBG funds are treated as program income and can be reused by the grantee for other eligible activities.¹

State and local economic development grants usually use a pro-rata formula tied to the unmet portion of the obligation. A 10-year compliance requirement breached after four years might mean repaying 60% of the grant. When jobs are the metric, the formula often reflects the ratio of jobs not created to jobs promised. These formulas vary by jurisdiction, so the grant contract controls.

Exceptions That Reduce or Eliminate Recapture

Federal Mortgage Subsidy

Section 143(m) does not apply at all when the home transfers because of the owner’s death. A transfer to a spouse or former spouse in a divorce also avoids recapture as long as no gain or loss was recognized on the transfer. If the home is destroyed by a casualty such as fire or flood, recapture is generally waived if you rebuild on the original site within two years after the end of the tax year of the destruction. Home improvement loans that were the sole basis for the federal subsidy are also excluded.⁵

LIHTC

The biggest practical exception is the continued-use rule. No recapture applies when a building is sold or otherwise disposed of if it is reasonably expected to keep operating as qualified low-income housing for the rest of the compliance period. Most arms-length sales between developers are structured to meet that test. An owner can also post a bond with the IRS to be discharged from recapture liability in connection with a disposition.²

For casualty damage from fire, storm, or a similar event, the owner can avoid recapture by restoring the building’s qualified basis within 24 months after the end of the calendar year of the casualty. A presidentially declared disaster can extend that deadline. Any reduction in qualified basis, even a temporary one, has to be reported to the IRS on Form 8823.

Which Form to File

The form follows the benefit.

LIHTC owners with a decrease in qualified basis file Form 8611, which calculates the recapture amount plus the required interest and adds it to tax liability for the year of the noncompliance.⁶
Homeowners who sell a federally subsidized home within nine years attach Form 8828 to the income tax return for the year of the sale. The form walks through the holding period percentage, income percentage, and 50% gain limitation.⁵
CDBG and other grant repayments go back to the local grantee or, depending on the program and HUD field office’s instructions, directly to the U.S. Treasury, typically by check or wire to the designated account.

Timing matters for tax credit recapture. The amount is added to tax for the year the noncompliance actually occurred, not the year you catch it or receive a notice. Realizing belatedly that qualified basis dropped two years ago can mean amending prior returns and paying interest running from each affected year’s filing deadline.

Staying Out of Recapture

Compliance failures are rarely dramatic. They are usually paperwork lapses or slow drifts in occupancy that no one catches until an audit.

Keep records past the minimum. For LIHTC properties, the IRS requires records of tenant income, rent, and occupancy status for at least six years after the due date of the return for each year, and records for the first year of the credit period have to be kept for at least 21 years. Electronic storage has to prevent unauthorized changes, produce legible reproductions, and maintain a clear audit trail from source documents to the general ledger. Switching systems and losing the ability to retrieve older records is treated by the IRS as destruction of those records.⁷

Track performance continuously. For incentives tied to job creation, waiting until the annual certification date to count heads invites shortfalls. Monitor hiring, wages, and retention on a rolling basis so a shortfall can be corrected before the reporting window closes.

Communicate early. If a compliance problem is coming — a major tenant leaving a LIHTC property, a factory scaling back hiring — contacting the granting agency before the breach preserves options that vanish after the fact. Some agreements allow cure periods, adjusted targets, or phased repayment when the recipient acts in good faith. That flexibility disappears once an audit finds the violation on its own.

1
eCFR. 24 CFR 570.503 – Agreements With Subrecipients
2
Office of the Law Revision Counsel. 26 USC 42 – Low-Income Housing Credit
3
Office of the Law Revision Counsel. 26 USC 143 – Mortgage Revenue Bonds
4
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
5
Internal Revenue Service. Instructions for Form 8828 – Recapture of Federal Mortgage Subsidy
6
Internal Revenue Service. About Form 8611 – Recapture of Low-Income Housing Credit
7
Internal Revenue Service. Revenue Procedure 97-22