written by Jay Logal
If you were considered a “first-time homebuyer” in 2008, 2009, 2010 or 2011, you may have taken advantage of the first-time homebuyer tax credit on your income tax return. Although this credit is no longer available, certain events could trigger the repayment of this credit that was taken on a prior year return, therefore resulting in a potential tax liability. However, each answer is based upon individual circumstances.
The first-time homebuyer credit started in 2008. This credit of up to $7,500 taken in 2008 requires repayment. The repayment would have started with the 2010 1040 filing. A total of 15 equal annual payments are required with each year’s 1040 filing so the 2008 credit was in effect a 15 year interest free loan. If your home ceases to be your principal residence anytime during the 15 year payback period you may be require to pay the remaining balance with that year’s 1040 filing.
If you took the credit of up to $8,000 in 2009, 2010 or 2011 it requires no repayment unless the home purchased ceases to be your principal residence within 36 months from the date of purchase. If that happens the full amount of credit you took may need to be paid back with that year’s 1040 filing.
With both variations of the credit your home could cease being your principal residence in a variety of ways. Here are some common ways this could occur:
- You sell your home
- Conversion of your home to rental or business property
- Conversion of your home to a vacation or second home
- Your home is destroyed (tornado) or condemned
- Your home is foreclosed
- You die.
Although death and taxes seem to have a relationship, in this case they are not linked. If you are single and die, there is no recapture of this credit.
Selling your home to a related person or entity requires repayment of the full amount of the credit. If you sold your home to an unrelated person or entity though, the repayment of the credit is only required to the extent of gain you have on the sale. If your home is destroyed or condemned, the recapture rules will not apply provided the taxpayer acquires a new principal residence in the required replacement period.
Example: Sara purchased a home in 2010 for $105,000, and took an $8,000 first-time homebuyer credit on that purchase. In 2012 she sold the home for $100,000. Sara would be required to pay back $3,000 of the $8,000 credit she took.
Colby purchased his home in 2008 for $95,000, and took a $7,500 first-time homebuyer credit on that purchase. On his 2010 and 2011 1040 filings he paid an addition $500 on each in repayment of this credit. In 2012 he sold his house for $90,000. Colby would be required to pay back $1,500 of the $7,500 credit he took.
Everyone’s tax situation is different. Those differences combined with our complicated tax code makes applying general information to specific situations difficult. The above general information is not meant to provide you with specific tax advice, but rather to encourage you to prepare yourself for your specific situation. If you have any questions about the first-time homebuyer tax credit, please contact us today.