Under What Conditions Do You Have to Repay the First Time Homebuyer's Tax Credit?

Whether you have to repay the first time homebuyer's tax credit depends on which tax credit you claimed. There were two homebuyer credits, one in 2008 and another in 2009 that was extended into 2010. The credit for homes purchased in 2008 has to be repaid over a 15-year period and was in effect an interest-free loan from the federal government. The credit for homes purchased in 2009 and 2010 only has to be repaid if the home ceases to be your main home within a 36 month period.

2008 first time homebuyer credit

If you claimed the first time homebuyer credit in 2008, you had to begin repaying the credit in 2010. You repay one fifteenth each year, so if you claimed the maximum credit of $7,500 you would repay $500 each year. The repayment is reported on Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The amount of the repayment is added to your tax for the year, reducing your refund or increasing the amount of tax you owe.

If you sell the home or convert it to a business or rental property before the 15 year period is up, you would have to include all the remaining installments as repayment in the year you no longer use the home as your principal residence. If the home is destroyed or condemned and you acquire a new home within two years, you would have to continue paying the installments for the remainder of the 15 year period.

But there are certain situations in which you do not have to repay the 2008 homebuyer credit. One exception is if you sell the home without a gain to a person who is not related to you. This would include a foreclosure. In that case the remaining installments may be reduced or eliminated. If you sell the home at a gain, you would have to repay the homebuyer credit only up to the amount of the gain.

If the home was transferred as part of a divorce settlement, only the former spouse who kept the home is responsible for repaying the credit. If a spouse dies after having claimed the homebuyer credit on a joint return, the surviving spouse only has to repay 50 percent of the credit.

2009 and 2010 homebuyer credit

If you claimed the first time homebuyer credit in 2009 or 2010, you don't have to repay the credit at all provided the home is your primary residence for at least 36 months after the purchase. If you sell the home within this 36 month period, or you convert the home to business or rental use and no longer occupy any part of the home as your principal residence, you would have to repay the entire credit.

If you sell your home to a related person within the 36 month period, you would have to repay the full amount of the credit. If you sell your home to an unrelated party, you would have to repay the credit up to the amount of your gain on the sale.

If your home is destroyed or you sell the home under condemnation or the threat of condemnation within the 36 month period, and you do not purchase or rebuild a replacement home within two years you would have to repay the homebuyer credit up to the amount of any gain on the disposition. If you acquire a new main home within two years, you would not have to repay the homebuyer credit.

If you convert the entire home to a business or rental property, or to a vacation or second home, you would have to repay the entire credit.

If you no longer live in the home for the greater number of nights in a year within the 36 month period, you would repay the entire credit.

If you lose your home in a foreclosure within the 36 month period, you must repay the credit up to the amount of any gain on the foreclosure.

If you are divorced and the home is transferred to your former spouse, your former spouse is responsible for repaying the credit if the home is no longer used as a principal residence within the 36 month period. You as the transferor spouse would not be responsible for any repayment in that case.

If you are a member of the uniformed services, the Foreign Service, or an employee of the intelligence community, you do not have to repay the credit if you sell or no longer occupy the home as your principal residence because you receive government orders to serve on qualified official extended duty.

Sources:

Brian O'Connell, Homebuyers Will Repay Tax Credit to Uncle Sam, Banking My Way

First-Time Homebuyer Credit Questions and Answers: Homes Purchased in 2008, IRS

First-Time Homebuyer Credit Questions and Answers: Homes Purchased in 2009 or 2010, IRS

Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, IRS

Ilyce R. Glink, Repaying The $8,000 First Time Home Buyer Tax Credit, ThinkGlink

Instructions for Form 5405, IRS

Les Christie, Homebuyer tax credit: 950,000 must repay, CNN Money