February 9, 2016

Repayment Terms for First-Time Homebuyer Tax Credits

Did you take advantage of the First-Time Homebuyer Tax Credit in 2008, 2009 or 2010?  It’s important to understand your repayment terms and conditions, depending on when you bought your home. Many first-time homebuyers, myself included, took advantage of this credit.  The idea that I was going to get $8,000 cash back for purchasing my first home fresh out of college was music to my ears.  But, are you aware that there are different rules for each of the tax credits?

First Time Homebuyer

If you were a first-time homebuyer and purchased your home between April 8, 2008 and December 31, 2008, then you could have claimed a tax credit up to $7,500 on your 2008 individual income tax return.  This 2008 legislation was a first in a series of legislation designed to stimulate the housing market, but inevitably there was a catch.  The $7,500 credit was not a gift from the government, but more of an interest-free loan that required the homebuyer to pay back the credit in $500 installments over the next 15 years. If you were someone who claimed this credit on your 2008 tax return, beginning with your 2010 return, you should be filing Form 5405 with your individual income tax return and adding $500 of the credit to your tax liability ($7,500/15 years).

Now as long as the home purchased remains your principal residence until 2024, you simply have to fill-out Form 5405 and add $500 to your tax liability over the next 15 years.  However, most first-time homebuyers are unlikely to stay in their first home for 15 years.  Therefore, if you have sold or plan to sell your home between 2008 and 2024 be prepared to pay back the remaining balance of the credit on your income tax return for the year of sale.  For example, if you purchased your home in 2008 and claimed the $7,500 credit and you sold your home in 2015, you will be liable to pay back the remaining balance owed of $5,000 on your 2015 income tax return ($7,500 less $2,500 from five – $500 installment payments made for years 2010-2014).  If there is no gain or even a loss on the sale, then the remaining installments may be reduced or eliminated.  This acceleration of recapture payment also applies if you decide to purchase another home and rent out the property in which the tax credit was claimed.

Credit Payback Requirement

There are a few exceptions in which one may not be liable to pay back the full credit.  If you sell your home and the gain on your home is less than the remaining amount owed back on the tax credit, the maximum credit you would have to repay is the amount of the gain.  If you file for divorce and you deed your home to your spouse in a divorce settlement, then your former spouse will become responsible for making the remaining recapture payments.  If you lose your home in a foreclosure, then you are responsible to pay back the credit only up to the amount of any gain. Finally, if you pass away, then you will also be off the hook for the remaining payments.

Well what if you were a first-time homebuyer in 2009 or 2010?  Then, luckily for you, this is not an instance to which the early bird gets the worm.  If you were a first-time homebuyer in 2009 or signed a binding contract by April 30, 2010 and you closed on your home on or before September 30, 2010, you could have claimed a tax credit up to $8,000, and with some exceptions, DID NOT have to repay. Unlike the 2008 legislation, a first-time homebuyer would only be required to remain in the residence for 36 months.  In addition, long-time residents who purchased a home between these dates were eligible to claim a tax credit up to $6,500 that also didn’t require a payback, with some exceptions.  The term “long-time resident” is described as someone who lived in their current home for a five-consecutive-year period of the eight year period ending on the closing date of their new principal residence.

Finally, there was a first-time homebuyer tax credit offered in 2011 for members of the Armed Forces and certain employees serving outside the U.S.  The 2011 legislation allowed these individuals to have an extra year to buy a principal residence and still qualify for the tax credit offered in 2009 and 2010.  An eligible taxpayer must have bought or was in a binding contract to buy a principal residence by April 30, 2011 and close on the purchase by June 30, 2011.

If you have additional questions regarding your first-time homebuyer tax credit or other housing tax credits, contact an Anders advisor today.

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