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Understanding the First Time Homebuyer Tax Credits

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The housing market crash resulted in the government’s decision to try and stimulate homebuying with tax credits. However, it is important to note that, because there were different tax credits being offered, you may have to pay back your tax credit. If you bought a home in 2008, taking advantage of the first time homebuyer tax credit, you are in the group of people who has to repay the tax credit. This is because the tax credit wasn’t a true credit at all; it is a 15-year interest-free loan. If you took advantage of the tax credit, you have to start repaying it with your 2010 taxes — which means the taxes you are in the process of preparing right now.

With this post, we hope to explain which tax credits need to repaid and which ones don’t.

2008 First Time Homebuyer Tax Credit

If you bought your first home between April 8, 2008 and December 31, 2008, and you decided to make use of the tax credit, it’s time to start paying it back. This credit amounted to $7,500 or 10% of the price of the home, whichever was smaller. If you repay the full $7,500 over the course of 15 years, that means you will pay $500 a year.

When filing, you will need attach the 2010 revised version of Form 5405. Fill out the form, and make sure it accompanies your tax return. This will ensure that everything is in order as you begin to repay your first time homebuyer tax credit. The IRS does offer some guidelines for tax credit repayment.

  • Installments remaining after your death are not due. However, if you are married filing jointly, the surviving spouse has to pay half the remaining amount.
  • If you stop using the home as a primary residence, you no longer have 15 years to repay the credit; the remainder is due immediately.
  • Repayment on the remainder is due when you sell the home. However, you only have to pay up to the gain on the sale.
  • The spouse who retains the home in a divorce is responsible for finishing the payments.

2009 – 2010 Homebuyer Tax Credits

As you know, the homebuyer tax credit got better for homes purchased in 2009 and early 2010. These tax credits were offered to existing homeowners making a new purchase of a primary residence, as well as to first time homebuyers. For those who bought between January 1, 2009 and April 30, 2010 (settlement date September 30, 2010), the tax credit is a true credit — no repayment required. However, if you have already moved out of the home you bought in 2009 or early 2010, you may have to repay the homebuyer tax credit.

One of the requirements of getting the newer version of the homebuyer tax credit is that you have to maintain the home as a primary residence for 36 months. So if you move out — even if you still own the property — you have to repay the credit. Additionally, if you sell the home you have to pay back the credit. You only have to repay up to the home’s gain, though, so you may not have to repay the entire credit. There are some exceptions to the requirement to repay the credit immediately on your next tax return:

  • If the spouse of a deceased homeowner continues to live in the house. If the spouse sells the home, though, before the time is up he or she must repay half the credit.
  • Spouse remains in home to finish the 36 months after a divorce.
  • Military or other personnel required to move more than 50 miles away.
  • If your home is involuntarily damaged and you are forced to move. However, you have to buy a new home within two years.
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17 Responses to “Understanding the First Time Homebuyer Tax Credits”

  1. skylog says:

    i understand the reasons for the different credits, and the reasons they gave for the different terms, but i have to feel for those that may have missed out by a short time from not having to pay the credit back.

    i do think that everyone should have done their own dd, so i do not feel for those that went in and signed their name not doing the proper research, but i just do not like how they shifted the credits mid way through the plan.

  2. HedgeHoncho says:

    I don’t know why they make it so complicated for everyone.

    We should get rid of all the fine print and make it black and white.

  3. Michael says:

    The comment

    ‘Repayment on the remainder is due when you sell the home. However, you only have to pay up to the gain on the sale.’

    is a little misleading, as the remainder of the credit is subtracted from the basis on the worksheet. The ‘gain’ on the sale in this statement includes the remainder of the credit (form 5405 worksheet line 5,6)

    Bottom line if you sell the house for exactly what you paid for (net of expenses) you still have to repay the credit. If you have a loss (not including the credit) if can be offset against the amount to pay the feds up to amount of the credit.

    If this seems confusing, it is, but if you use the worksheet on the 5405, fill in a few numbers on seven lines and you’ll see what I’m getting at.

    Michael

  4. Shirley says:

    Jim, a question please:

    My son and his wife bought their first home in June 2010. The Real Estate salesman told them that they were eligible for this tax credit because they settled in August, which was before the settlement deadline.

    Were they misinformed by the salesman and are actually not eligible for the credit?

    • Miranda Marquit says:

      Was the home in the process of being bought by April 30? If the contract was in place by April 30, they should still be eligible. However, if they did not have a contract in place, they are not.

  5. Strebkr says:

    I also know of a couple who were engaged who used this to their advantage. He bought her house to take advantage of the credit. They got a better mortgage rate since rates had fallen since she bought it, and the best part, no one had to move anywhere. It was an arms-length transaction since they weren’t married yet.

    I wonder if this happened more then we think.

  6. Texas Wahoo says:

    It should also be noted that the credit is only available to those who make below a certain income threshhold.

    • cubiclegeoff says:

      I think the threshold went away or went very high for the last couple of months of the credit.

      • Texas Wahoo says:

        “For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.”

        • Strebkr says:

          That is a pretty high threshold. One day I would love to be phased out of something like this. I’m sure I would have other problems to worry about at that point.

  7. BB says:

    What happens if the first time single homebuyer dies a month after he purchased the home in 2010? Is the credit still avaiable?

  8. beverly says:

    Does anyone know if there are any exceptions to the military exception my husband is getting ready to join the military and will have to move about 1000 miles away for schooling. Does this mean we are eligible to sell or rent our home when the move is nesicary? Thanks for all help!

  9. les w. says:

    I have a comment THE IRS IS COMING AFTER YOU BELIEVE ME THEY ARE CHARGING ME A $1500.00 PENALTY because my prior home was in my ex wife’s name and that is deemed by the IRS as homeownership because I was married to the home owner. They want $1500.00 penalty +++++ interest for $800++


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