Original Post Date: October 28, 2010
By: Bill Bischoff
Back in 2008, when the housing market was in even deeper trouble than it is in now, Congress passed the Housing and Economic Recovery Act to help move a glut of homes off the market. One of the key provisions was a tax credit for first-time homebuyers. That provision would be extended (twice) – and getting in early would have been a mistake.
If you claimed a federal income tax credit for a 2008 home purchase, you’ll probably have to pay it back over 15 years, starting with your 2010 Form 1040 (due next April). In contrast, if you claimed a credit for a 2009 or 2010 purchase, you probably won’t have to pay it back. (Blame Congress’s patchwork legislating.)
Before getting into whether the credit repayment rules will affect you, let’s briefly revisit how the homebuyer credit itself works.
Homebuyer Credit Basics
First Version: The original credit was up to $7,500 for individuals who bought a U.S. principal residence between April 9, 2008 and Dec. 31, 2008 and had not owned one for the three-year period ending on the purchase date.
Second Version: Congress increased the credit to up to $8,000 for individuals who bought a U.S. principal residence between Jan. 1, 2009 and April 30, 2010 and had not owned one for the three-year period ending on the purchase date. However, the closing deadline was extended to June 30 for homes that were under contract as of April 30. The deadline was further extended to Sept. 30 for homes that were under contract as of April 30 and were contracted to close by June 30 but did not.
Third Version: This credit offers up to $6,500 to so-called longtime homeowners, which means those who had owned a U.S. principal residence for at least five consecutive years during the eight-year period ending on the purchase date for a new U.S. principal residence. For this third version, the purchase date had to be between Nov. 7, 2009 and April 30, 2010. However, the closing deadline was extended to the same dates as for the second version.
Repayment Rules for First Version
Buyers who claimed the original version of the credit (for 2008 purchases) are generally required to repay the credit in equal installments over 15 years, starting with their 2010 tax return.
Example: Say you claimed a $7,500 credit for a $200,000 purchase in 2008. You’ll generally have to add $500 (one fifteenth of $7,500) to the tax bill shown on your 2010 Form 1040. Assuming you continue to own the home, you’ll do the same thing for the following 14 years (2011 and beyond). However if you sell in 2010, you’ll have to repay the lesser of: (1) the $7,500 credit or (2) your gain on sale (if any).
To see if you have a gain for credit repayment purposes, you must reduce your cost basis in the home by the credit. In this example, if you sold the home in 2010 for $195,000, you’re considered to have a $2,500 gain for credit repayment purposes. That’s because the $195,000 sale price exceeds your home’s $192,500 cost basis ($200,000 actual cost reduced by the $7,500 credit). So you’ll have to repay $2,500 (lesser of the $7,500 credit or the $2,500 gain on sale) with your 2010 return.
However, if you have a loss on sale (after reducing the home’s basis by the credit), you don’t have to repay the credit.
Exceptions: If you or your spouse is in the military and had to sell because of an order to relocate for extended duty, you don’t have to repay the credit. If you transfer the home to your ex as part of a divorce settlement, the credit repayment obligation becomes his or her problem. Finally, folks who die don’t have to repay the credit (nor do their heirs).
Repayment Rules for Second and Third Versions
If you claimed a credit for a 2009 or 2010 purchase, the 15-year repayment rule doesn’t apply (it only applies to 2008 purchases). But if you sell the home in 2010 or stop using it as your principal residence this year, you’ll generally have to repay the lesser of: (1) the full amount of the credit or (2) your gain on sale (if any). If you have a loss, you don’t have to repay the credit. The earlier example explains how to determine if you have a gain or loss.
Exceptions: For post-2008 purchases, the credit repayment obligation disappears after you’ve owned and used the home as your principal residence for over three years. In addition, the credit repayment exceptions listed for the first version of the credit also apply to the second and third versions.
The Last Word
The credit repayment rules are confusing, but you won’t have any difficulty following them at tax-return time. Just fill out Parts III and IV of the 2010 version of IRS Form 5405 (First-Time Homebuyer Credit and Repayment of the Credit), and add the credit repayment amount to your tax bill on the indicated line of Form 1040. You can get an advance look at Form 5405 at the IRS web site: www.irs.gov. While I hope you’re blissfully unaffected by the credit repayment rule, you now know the score if you are.