Repaying the First-Time Homebuyer Credit
Some will have to pay back the credit in later years
By Kaye A. Thomas
Posted February 27, 2009
One set of rules for 2008 purchases, another for 2009 purchases.
If you claim the first-time homebuyer credit for a purchase in 2008 you have to repay the credit over a period of 15 years (or faster if the home ceases to be your main home before that period is up). If you claim the credit for a purchase in 2009 you won't have to repay the credit unless the home ceases to be your main home within three years after the purchase. The repayment rule has some exceptions, though.
Continuing to use the home
If your purchase occurred in 2008 you have to repay one-fifteenth of the credit per year in the form of additional tax on your income tax return beginning with the return for 2010. (Note that this means a one-year delay in starting to repay the credit, because no repayment is required on your 2009 tax return.) The repayment amount would be $500 per year if you claimed the maximum credit of $7,500. As a result, the credit operates much like an interest-free loan. Subject to exceptions explained below, however, the entire unrecaptured credit must be repaid in a single year if the home ceases to be your main home.
For a purchase in 2009 you won't have to repay the credit if you continue to use the home as your main home for at least three years. Subject to exceptions explained below, the entire credit must be repaid in the year the home ceases to be your main home if that occurs within three years after the purchase.
Ceasing to use the home
For a home purchased in 2008, ceasing to use it as your main home before 2024 (the year of the last of fifteen repayments) will generally require you to repay the entire remaining amount on your return for the year the use of the home changed. For a home purchased in 2009, a change in the use of the home within three years after the purchase can have more drastic consequences, because it means repaying the entire credit, which you would otherwise not be required to repay. There are several rules that can affect this repayment obligation.
Spouses. If you claimed the credit on a joint return, the IRS treats each spouse as receiving half the credit for purposes of the repayment rules. A change in use doesn't occur until both spouses cease to use the home as their main home. Also, if the home is transferred to a spouse or former spouse in a divorce, the entire repayment obligation shifts to the spouse who received the home, beginning with the year in which the transfer occurs.
Sale without gain. If you sell your home to an unrelated person, your repayment obligation is limited to the amount of gain you have on the sale. But "gain" is figured in a special way that includes any part of the credit that hasn't been repaid. For example, if you buy a home for $150,000 and end up selling it for $148,000 (net of expenses) at a time when you still have $4,500 of unrecaptured credit, it may appear that you have a $2,000 loss, but for purposes of this rule you're treated as having a gain of $2,500, because you have to subtract the unrecaptured credit from your purchase price before figuring gain or loss.
Involuntary conversion. If the home is destroyed, condemned, or disposed of under threat of condemnation, and you acquire a new main home within two years of that event, you're treated as if you continued to use the original home as your main home.
Death of taxpayer. Credit recapture doesn't apply after the death of the taxpayer. The decedent's share of any credit remaining unrecaptured at that time is forgiven. If the credit was claimed on a joint return, the surviving spouse would continue to have a recapture obligation as to half the credit. This rule seems harsh, as the death of one spouse may effectively force the other one to move out of the home in some situations, but for now at least this is the rule.
Problems?
There's no special rule about recapture in the case of foreclosure, but people usually don't have a gain as a result of a foreclosure sale, so in most cases recapture will not be a problem in this situation.
What if you take a new job in another city? The credit will be recaptured on your existing home whether you sell it or not, because it's no longer your principal residence. And you won't get a new credit when purchasing the replacement home (you've owned a home within the preceding three years, and this provision expires 11/30/09), so this seems like a glitch in the law. You have a similar problem if you leave your home to live in a nursing home because there's no provision covering that contingency.
There's also no special rule for people who make a gift of their home, and this is a potential gotcha. Someone who bought a home in 2008 and ends up gifting it to a child ten years from now may not realize the gift will require them to come up with thousands of dollars extra on that year's tax return.
