If you purchased a new home between 2008 and 2010 (2011 if you were in the armed forces), then you probably took a first-time homebuyer credit on your tax return in the corresponding year. While this was a great incentive from the government to boost spending, a lot of the taxpayers are now dealing with the consequences of taking that credit.
If you purchased your home and took the credit in 2008, there are different rules that apply. The credit in 2008 was, in essence, a loan that the taxpayer had to repay back in equal installments over the course of 15 years. If you sell the home within 15 years of purchasing the home, then you are required to pay back the entire credit in the year of sale. If the sale is not to a related party, then you only have to repay the credit up to the extent of the gain on the sale of the house. If the sale is to a related party, then you have to repay back the entire amount of outstanding credit balance (total credit received less any amounts previously repaid). The maximum credit allowable in 2008 was $7,500.
For homes that were purchased in 2009 and 2010, and for which the first-time homebuyer credit was taken, you do not have to repay back the credit, unless the home is sold, or if other various events listed below occur. The rules are a little different for these years. If the home is sold to a related party within 36 months of buying the home, then the full amount of the credit must be repaid. Similar to the 2008 rules, if the home is sold within 36 months to a non-related party, the credit only has to be repaid to the extent of capital gain recognized on the sale. The maximum credit allowable in 2009 and 2010 was $8,000.
For any of the years that taxpayers are eligible for this credit, if the home ceases to be their main home (either within 15 years for 2008 or 3 years for 2009 and 2010), then some type of credit repayment will be triggered. Examples are:
– You sell the home – credit must be repaid in year of sell (see paragraphs above for related vs. non-related party).
– You transfer the home to a spouse or former spouse in a divorce settlement – in this case the spouse would become responsible for repayment of the credit if the home is sold within the allotted time frames.
– You convert the entire home to a rental or business property – credit must be repaid in year of conversion.
– You converted the home to a vacation or second home – credit must be repaid in year of conversion.
– You no longer live in the home for the greater number of nights in a year – credit must be repaid in year of occurrence.
– Your home is destroyed or condemned – credit must be repaid.
– You lose your home in foreclosure – credit must be repaid only to extent of gain.
We have had issues with tax returns being rejected for electronic filing because of repayment of the first-time homebuyer credit. In one scenario, the IRS had applied all of the repayment to the taxpayer, and none of the repayments to the spouse. Because the IRS thought the spouse still had a balance due, the IRS was looking for the spouse to keep paying back the credit. In reality, the taxpayers had overpaid the credit, and were due a refund. We were able to get the issue resolved with the IRS over the phone.
There is a tool on the IRS website to look up the original credit taken, how much has been repaid, how much is still due, and the required annual installment repayment amount. You can find this at: https://sa.www4.irs.gov/irfof-fthb/.
Please let us know if you have any questions, or if we can be of any assistance to you.