Form 8611, Recapture of Low-Income Housing Credit, is used to calculate the additional tax you may owe when repaying part of a low-income housing credit claimed in an earlier year.
This repayment is called recapture. It generally applies when the qualified basis of a low-income housing building decreases or when you dispose of the building, or an ownership interest in it, without meeting the requirements that would prevent recapture.
When do you need to file Form 8611?
You may need to file Form 8611, Recapture of Low-Income Housing Credit, if either of these situations applies:
- The building’s qualified basis decreased from one year to the next.
- You sold or otherwise disposed of the building, or your ownership interest in it, and the transaction didn’t meet the requirements for avoiding recapture.
You must generally complete a separate Form 8611 for each building affected by a recapture event.
What does “qualified basis” mean?
In simple terms, qualified basis is the portion of a building’s eligible cost that’s connected to qualified low-income rental units. It plays a key role in determining the amount of low-income housing credit available for the property.
A building’s qualified basis may decrease if:
- Units are no longer occupied by income-qualified tenants.
- Units no longer meet rent restrictions.
- Units aren’t suitable for occupancy.
- The project no longer meets its minimum set-aside requirement.
- The building’s eligible basis or applicable fraction decreases.
If the decrease causes the property to fall below its minimum set-aside requirement, the entire accelerated portion of the credit may be subject to recapture.
Does selling a low-income housing building always cause recapture?
Not necessarily. Disposing of a building or an ownership interest generally doesn’t trigger recapture if it’s reasonable to expect that the building will continue operating as a qualified low-income building for the rest of its compliance period.
The compliance period is generally the 15-year period during which the building must continue meeting the federal low-income housing requirements. Because the rules for a sale or ownership transfer can be complex, keep all documents showing that the property is expected to remain compliant after the transaction.
Are there other exceptions to recapture?
Recapture generally doesn’t apply when:
- You dispose of the building or an ownership interest and meet the requirements for avoiding recapture.
- You dispose of an ownership interest held through certain partnerships covered by section 42(j)(5).
- The decrease in qualified basis doesn’t exceed later additions to qualified basis for which credits were allowed after the first year of the credit period.
- Qualified basis decreases because of a casualty loss, provided the property is restored or replaced within a reasonable period.
How is the recapture amount calculated?
Form 8611 uses the credit claimed in prior years, the property’s qualified basis, the year of the recapture event, and the percentage decrease in qualified basis to calculate the accelerated portion of the credit that must be repaid.
The recapture percentage generally gets smaller in the later years of the 15-year compliance period:
- Years 2 through 11: 33.3%
- Year 12: 26.7%
- Year 13: 20%
- Year 14: 13.3%
- Year 15: 6.7%
Interest may also apply. It’s calculated separately for each earlier tax year affected by the recapture. The form then reduces the total amount by certain unused credits attributable to the building to determine the final recapture tax.
What records will you need?
Before entering the recapture, gather copies of the following forms, if applicable:
- Form 8586, Low-Income Housing Credit
- Form 3800, General Business Credit
- Form 8609, Low-Income Housing Credit Allocation and Certification
- Form 8609-A, Annual Statement for Low-Income Housing Credit
- Any previously filed Form 8611, Recapture of Low-Income Housing Credit
- Any Schedule K-1 showing a recapture amount passed through from a partnership, S corporation, estate, or trust
You’ll also need the building’s address, building identification number, placed-in-service date, and information about any tax-exempt bond financing.
Keep the applicable housing credit forms for at least three years after the 15-year compliance period ends. These records help support changes in the building’s qualified basis from year to year.
What if the recapture comes from a Schedule K-1?
A partnership, S corporation, estate, or trust may pass a low-income housing credit recapture amount through to an owner or beneficiary. In that case, the taxpayer generally enters the passed-through amount on Form 8611 rather than calculating the property-level amount from scratch. Special rules apply to certain partnerships covered by section 42(j)(5).
Program Entry
To enter a low-income housing credit recapture:
- Select Federal.
- Select Other Taxes.
- Select Recapture of Low Income Housing Credit (8611).
- Enter the requested building, prior-year credit, qualified basis, and recapture information.
If the amount was reported on a Schedule K-1, use the information supplied by the partnership, S corporation, estate, or trust.