There have been lots of questions about the 2008 First-Time Homebuyer Tax Credit, so Ruhl&Ruhl put together this information to help. As always, please talk to your tax advisor with questions that are specific to you or your family.

Before addressing repayment a brief look at the history of the homebuyer tax credit:

The original tax credit established in July of 2008 was for a maximum of $7,500 for qualified first-time homebuyers who purchased a principal residence after April 8, 2008 and before January 1, 2009 (originally before July 1, 2009 prior to modification).

In February of 2009 the maximum amount of the tax credit was increased to $8,000 for qualified buyers effective for purchases after December 31, 2008 and before December 1, 2009.

In November of 2009 the date for qualifying purchases was extended to before May 1, 2010.  A separate deadline was established extending the closing date to before July 1, 2010 for binding contracts executed before May 1, 2010.  A third version of the tax credit was also established at this time.  This was a maximum credit of $6,500 for qualified long-term residents who purchased a principal residence after November 6, 2009 and before May 1, 2010 with the same closing date requirement.

In June of 2010 the closing deadline was extended from before July 1, 2010 to before October 1, 2010.   

Repayment of the homebuyer tax credits:

2008 Purchases:  If you claimed the credit for a home purchased in 2008, you generally must begin repaying it on your 2010 return.  The 2008 homebuyer tax credit is required to be repaid evenly over a period of 15 years, starting in 2010.  If the home ceases to be your main home before the 15-year period has elapsed, you must include the remaining unrecaptured balance of the credit as additional tax on the return for that year.  There are exceptions to the accelerated repayment rule which are listed below.    

Exceptions:

• In the case of the sale of the home to a person who is not related to you, the repayment is limited to the amount of the gain, if any, on such sale.  However, when calculating the gain, you must reduce the adjusted basis of the home by the amount of the credit.
• If the home is destroyed, condemned, or disposed under the threat of condemnation and you purchase a replacement home within two years of the event, you continue to repay the credit in installments each year.
• If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for making the rest of the repayments.
• If you die no further payments are due.  If you claimed the credit on a joint return, your surviving spouse pays only his or her half of the rest of the repayments.
• In some cases, there is an exception for members of the uniformed services or Foreign Service and for intelligence community employees.

2009 & 2010 Purchases:  If you claimed the credit for a home purchased in 2009 or 2010, the credit is not required to be repaid unless the home ceases to be your main home within 36 months of the date of purchase.  If the home ceases to be your main home within the 36-month period, you must include the credit as additional tax on the return for that year.  There are exceptions to the repayment rule which are listed below.  You do not need to repay the credit as long as the home remains your main home for the three years after the purchase.

Exceptions:

• In the case of the sale of the home to a person who is not related to you, the repayment is limited to the amount of the gain, if any, on such sale.  However, when calculating the gain, you must reduce the adjusted basis of the home by the amount of the credit. 
• If the home is destroyed, condemned, or disposed under the threat of condemnation and you purchase a replacement home within two years of the event, you do not have to repay the credit.
• If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit if required.
• If you die repayment of the credit is not required.  If you claimed the credit on a joint return, your surviving spouse must repay his or her half of the rest of the credit if required.
• In some cases, there is an exception for members of the uniformed services or Foreign Service and for intelligence community employees.

IRS Notice CPO3A (2008 credit), IRS Notice CPO3B (2009 & 2010 credit) and IRS Form 5405:

Each year the IRS will notify taxpayers who claimed the homebuyer tax credit of the repayment requirements.  The letters explain if and when you have to repay the credit.  There are different IRS letters for different situations, including a purchase of a home in 2008, 2009 or 2010, a sale of a main home, or change in the use of a main home.  IRS Form 5405 is used by the tax payer to report all homebuyer tax credit related transactions (credits, repayments and any changes in the use of the home).

Additional information on the homebuyer tax credit and repayment requirements is available on the IRS website, www.irs.gov.   An informative summary can be found on the IRS’s newsroom page at the URL www.irs.gov/newsroom/article/0,,id=204671,00.html.

Taxpayers are urged to consult a professional advisor for advice on all tax matters including homebuyer tax credits and related repayment requirements.  While the information contained herein is deemed to be accurate and reliable it should not be relied upon as professional tax advice or services.

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