Repaying the First-Time Homebuyer Tax Credit

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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
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.

Comments (85) Leave your comment

  1. IRS has incorrectly calculated my homebuyer credit. Getting someone there to help has been a nite mare for the last 3 years. I only have tax info for the 5 of the 9 years ive had this loan. I made overpayments and calculate they owe me a minimum of 1000 ive overpayed. Last year I just payed the exact amount the IRS website said remained in my balance of 2250. Paid that and guess what……..they still said I owed 1000. I don’t know if it’s a mixture of hr block and TurboTax that’s not filing the payments correctly or did my divorce screw something up? I can’t wait by a phone and hope for someone to call me for help so I need to contact someone who can look up my payment history. Do the simple math and correct this issue. IRS has been my worst nite mare I’ve ever had to deal with. We need to start creating jobs so people like me can talk to live people who can help. Automated routing to get you to departments that don’t exist makes people like me lose faith in the system. The government owes tax payers millions of dollars each year and expect us to show them how they processed my money incorrectly. Guilty until you prove them wrong. All I need is someone from the IRS to look up my tax filing from 2008 to current, do the math and pay me the 1000 plus dollars they owe me. Not IRS advocates, no lawyers. Actually someone from the IRS to fix their mistake. Can anyone please assist me and besides the general call this vague phone number that gets me nowhere once again. I would like a phone direct number and a persons name to the IRS that specifically handles home buyer credit desputes. Turbo tax I will not pay the additional 40$ for your upgraded package either. I shouldn’t have to pay this for basic tax filings. Please don’t ask again. Again. A phone number with my same issue to a live person that specifically helps people like me get back the money the IRS miscalculated for home buyer credits from 2008. Yes I’m frustrated. It’s been 3 years I’ve been trying to get this resolved without a lawyer.

  2. My husband lost his job but later draw social security disability. .are we still responsible for the the full amount. ?

  3. Hi, I bought my house in January 2010 and refinanced it in 2011. Am I eligible for First time home buyers credit? If so, can I claim it now in 2015?

  4. I purchased condo 2008.after 2 years had to rent out due to family emergency.I was barely breaking even some years lost money.well jan 29 condo burned down lost rent paid dues and fees and mortgage for 8 months ..having to take homeowners insurance to court.and irs claims the full amount is due.what a mess can anyone make since of this.

  5. What if i took the credit for 2008 and lost house in 2010 but the people preparing my taxes failed to fill out the form 5405 to show that… now i just realized that they had been doing it incorrectly in 2014. how do i amend to fix the issue? The irs says i can’t amend taxes over 3 years old, if i put a 2010 move out date on my 2014 taxes it is rejecting. I am lost on how to fix this.

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