Repaying the First-Time Homebuyer Tax Credit
Did you take advantage of the First-Time Homebuyer Tax Credit in 2008? If so, congratulations. But if you sold your home in 2011, beware. You may be in for a tax surprise. Here’s why.
First-Time Homebuyers Tax Credit
Under 2008 legislation designed to stimulate the housing market, first-time homebuyers could claim a tax credit of up to $7,500 if they purchased a home between 4/8/08 and 12/31/08. But there was a catch: the credit wasn’t a gift from the government, it was really an interest-free loan that had to be repaid over fifteen years, beginning in 2010.
So, beginning in 2010 you had to file Form 5405 with your tax return each year and add 1/15 of the credit to your taxes owed. For example, if you received the maximum credit of $7,500, you’d divide that credit by 15 and add $500 to your income taxes each year for the next 15 years.
But here’s the problem – most people don’t stay in their home for 15 years. And when you sell your home, the remaining unpaid tax credit is added to your taxes for that year. So if you claimed the $7,500 credit in 2008, repaid $500 with your 2010 tax return, and sold your home in 2011, be prepared for an additional $7,000 tax bite when you file your tax return in April. Ouch!
What if your house didn’t increase in value, and you end up making next to nothing on the sale? Recognizing that the credit repayment could easily exceed the amount you realize, the IRS caps the amount you owe in recapture to the amount of the gain you realize. So if you bought your home for $150,000 and your sales proceeds after costs of sale are only $152,000, the maximum credit you’d have to repay is $2,000.
Here’s another trap to beware of. You don’t have to sell the home to become liable for the tax credit repayment. You can trigger the tax recapture by moving out of your home, even if you continue to own it. So if you moved out in 2011 and kept the home as a rental property, boom – you owe the rest of the tax credit with your 2011 tax return.
Fortunately the IRS has some mercy when circumstances are beyond your control. For example, if you deed your home to your spouse in a divorce settlement, there’s no recapture of the tax credit (but your spouse does have to repay the credit over the remainder of the fifteen years and triggers the recapture if he or she moves out within the 15-year period).
If you lose your home in a foreclosure, your repayment is limited to the amount of the gain. And if you die, you are off the hook as well. And if you or your spouse are in the military and sell because of an order to relocate for extended duty, you don’t have to repay the credit.
The 2008 credit had its traps and pitfalls, but it did help people buy the house they wanted and stimulated home sales. That’s why Congress later extended it to 2009 and 2010. Sorry to say, this isn’t a case where the early bird gets the worm.
When the credit was extended, it was increased to $8,000, expanded to include a reduced credit for those who were not first-time homebuyers, and only has to be repaid if the taxpayer moved out within three years. Unfortunately, those features were not applied retroactively to 2008, leaving early-adopters with an obligation to repay the tax credit that those who came later to the party didn’t have to.
Have product questions? We have your answers.
I got the FHB in 2008. I started renting my home in 2011 so I had to pay the whole credit back on my 2011 taxes. I input that into turbo tax and it just put a 0 on my return. Now my taxes are on hold since 3 March because of the FHB not being on my return. What happens now? Do they just look back at my last years return to see that I paid it already?
I got the credit in 2008. The house was foreclosed on in 2012. There was no loss or gain. Turbo Tax and every other e-file out there insists I have to pay this back and I don’t. I’m at my wits end.
We just returned from our tax preparer’s office disappointed and frustrated. We lost our home to foreclosure last year due to my husband’s job loss. We received the 2008 tax credit of $6500 for 1st time home buyers. We just found out we have to repay the balance now. We dont have $5500. If we had that kind of money, we wouldnt have lost our home. Any help out there for this type of situation?
I bought a house with another person back in 2008. We never filed jointly since we were never married. My ex filed for the first time home buyer credit on his taxes. I moved out in 2010 and released all my interest to the house to him. When I filed for taxes this year the IRS took the $500 payment. Should the repayment be paid by my ex?
This is the first year we have used turbtax and I am confused on this section. We bought our house in Sept. 2008 and recieved a $6,500 tax credit. We sold our house in Aug. 2012 and now we have to pay it all back at once? I thought we only had to do that if we lived in it less than 3 years???
Mark D,
From everything I have seen, you can do a payment plan with the IRS but there is interest involved. It really bugs me that if you got the same credit in 2009 you don’t have to pay it back at all but those of us from 2008 don’t get that same benefit. So stupid. Not sure why it was called a credit when the reality is it is a loan with penalities if you dare move within 15 years.
You can sign a petition about the credit here: http://www.petition2congress.com/2148/petition-7500-tax-credit/
That is really the only good thing I have found.
Same problem as Carrie here:
Hi,
We moved and are renting the home we got the credit for.. but we didn’t know we would have to pay it back in a lump sum. Does the IRS offer any sort of payment plan for it? Is there some way we can still pay it back in increments?
Help!
Thanks a lot, Carrie! So did you hear whether you have an extension or anything yet? I am dealing with the same issue, and am trying to find out how long I should wait before filing my taxes… Any help would be greatly appreciated. Thanks, again!
Can I file my taxes using Turbo Tax if I have the first time home buyers credit from 2008 or do I need to go to a specialist?
Great, so I owe an extra $6500 this year if I’ve moved out but haven’t sold my house yet? Now I have 2 mortgages and an extra tax payment. Why is it that every time I turn around it seems as though the government is really trying to force me into a hardship where I’ll really need their help.
Re: 2008 credit- Did Brad get an answer to his question? If I have the house for sale in 2012, due to a job move, does that trigger the recapture of the credit? House sold in 2013 for a loss…if I do not have to recognize the credit in 2012 (even though I moved out), it would appear that I would not have to recapture the credit in 2013 due to the loss on the sale. Does the move immediately trigger the recapture, even though I was trying to sell the house?
Hello,
I took advantage of the 2008 FTHB credit. I have already started the repayment plan. Only thing is that I totall forgot to include the repayment of 500 dollars in my tax return. The return was accepted by the IRS so does that mean that I have to do an amendment or will the IRS automatically correct it and deduct they payment? Please let me know.
Hey EH,
I did the same thing last year with the FTHB. Did you get a reply yet? I’m thinking of putting 1K on the 5405 Form this year to make it up.
Any input would be great!
JAM
have you received your refund back yet? I also forgot add the repayment fee of $500 and now it will be an even longer delay from what the lady at irs said. i just got off the phone
I bought my house in 2008 for 320k, I got the 7,500 first-time home buyer tax credit, I’ve been paying $500 for each year, but my house was shortsale in september 2012 for $118K, what happens with the remaining balance of the tax credit? do I have to pay it off in full on my 2012 tax retun? or is waved because of the shortsale?
Hi. Got the credit for a home purchased in 2009. Home foreclosed in 2012 significantly below value paid. Do I need to repay this tax credit still since it was less than 36 months?
Hi,
We moved and are renting the home we got the credit for.. but we didn’t know we would have to pay it back in a lump sum. Does the IRS offer any sort of payment plan for it? Is there some way we can still pay it back in increments?
I took advantage of the First-Time Home Buyer tax credit in 2008. In Dec 2011, I had to relocate for a job and immediately put my house on the market. My house has been on the Market for a year and has not sold. I did not convert it to a rental property. Will the IRS grant me any forgiveness on repayment? Give me another year to repay? I plan on converting my house to rental this year because it didn’t sell, but for 2012, do I have to repay the entire balance on the loan? It would be great to have a year of rental income on the property before having to pay off the loan.
Can anyone tell me if you have to repay the tax credit in full if you are military and receive orders to move? We did not sell our house and are renting it. I’m wondering if there is an exception for military families because there is no way we would be in one place for 15 years. Thank you
Hi Denise,
The Homebuyer Credit repayment may be waived if you receive a government order to move for a qualified official extended duty service. Please see this IRS information
http://www.irs.gov/uac/First-Time-Homebuyer-Credit:-Members-of-the-Military-and-Certain-Other-Federal-Employees
Thank you,
Lisa Greene-Lewis
I’m having trouble finding information on what’s the status of the first-time home buyers tax credit for 2012? Is it still available and what are the rules?
Janet
Hi Janet,
Unfortunately the First-Time Homebuyer credit expired in 2010 unless you were a member of the military. If you were a member of the military you had until 6/30/2011 to take advantage of the First-Time Homebuyer Credit.
Thank you,
Lisa Greene-Lewis
Lisa,
quick question! If we bought our house in 5/2008 and got the $7500, would we still have to pay it? Also, our house did drop in value, albeit a small amount.
Hypothetically, if we bought the house for 100k, tax value dropped to 99k, we ow 94k.
If we sold the home for 96k would we still owe the 2k? is that part of the ‘gains’ category?
Thank you for the help in understanding tricky law!
What happens if you have filed and you have direct deposit on you taxes and how do you amend the homebuyer credit that you owe and if the home is being short saled and not in foreclosure yet? How do you know how much you will still owe the government?
Hi Terie,
So I think you are saying you already filed your taxes and requested direct deposit, but need to amend your taxes for the homebuyers credit. You can still amend your taxes if you are getting a direct deposit, but if your home was not yet sold in 2011 you would not need to amend your tax return. If your home is being short saled or is foreclosed on this year, then you would start paying the credit back in the year your home is sold.
Thank you,
Lisa Greene-Lewis
Yes that is what I am saying. I remembered that we had started the repayment last year as we received something stating we owed $250 I think to start that. But this time we did the taxes on line and did not see a form for that. We did have help but as you stated we have moved from the house and no longer live there.
What should I do if I’ve already mailed in my tax refund and forgot to include the First Time Homebuyer Credit? Is it too late to mail in the 5405 or will IRS automatically deduct it from my refund?
Hi Mary,
If the homebuyer tax credit was excluded you should amend your tax return, but don’t amend your tax return until you find out if your tax return was accepted. If it is rejected then you just need to fix your tax return and not amend it.
Thank you,
Lisa Greene-Lewis
Hi Lisa,
I also forgot to include the payment for the homebuyer tax credit but it says my return was accepted, does that mean I will be getting my refund and they will just deduct the payment?
I paid back the $8,000 plus interest.