Credit Payback First-Time Homebuyer
To stimulate home sales, Congress established the first-time homebuyer credit in 2008, then modified it and extended it through the middle of 2010 (2011 for certain service members). The credit for 2008 required a fifteen year payback. The other years also has payback requirements but only if the terms of the credit were violated in the first three years after receiving the credit. Those time limits have long since expired and the only one left with a payback requirement is the 2008 credit.
How and When the 2008 Credit Must Be Repaid - The 2008 credit is similar to a 15-year, interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer's income tax return for that year. For example, if a $7,500 first-time homebuyer credit is properly claimed on the 2008 return, the taxpayer will begin paying it back on his or her 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.
However, some exceptions apply to the repayment rule. They include:
- Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due. If a joint return was filed and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount.
- Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions.
- Home Sold - If a home is sold, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. For example, a home is purchased for $200,000 and the credit of $7,500 is claimed. Assume that no improvements are made on the home and it is sold for $195,000 after repaying $500 of the credit. The gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment). In this case, there would be a gain of $2,000 on the sale ($195,000 - $193,000). Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold. Had the home sold for $193,000 or less, there would be no repayment required!
- Divorce - If a home is transferred to a spouse or to a former spouse (as part of a divorce settlement), that person is responsible for making all subsequent installment payments.
- Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply. However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence.
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