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Understanding the First Time Homebuyer Tax Credits

Posted By Miranda Marquit On 02/22/2011 @ 12:44 pm In Taxes | 17 Comments

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 [3] 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 [4]. 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 [5] 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 [6] 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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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/understanding-time-homebuyer-tax-credits.html

[3] repay the full $7,500: http://www.irs.gov/newsroom/article/0,,id=186831,00.html

[4] Form 5405: http://www.irs.gov/pub/irs-pdf/f5405.pdf

[5] homebuyer tax credit: http://www.bargaineering.com/articles/8000-first-time-homebuyers-credit.html

[6] settlement date: http://www.bargaineering.com/articles/3-month-homebuyer-tax-credit-extension.html

Thank you for reading!