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March 9th, 2010 (Modified on April 7th, 2010)

How Well Do You Know the Homebuyer Tax Credit?

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Is the homebuyer tax credit a loan? Is it a credit? Is it a one-time check for a couple grand? Does it ever have to be repaid? These are all good questions, and questions we’re not sure everyone knows the answers to. As tax time is upon us, it’s more important than ever to understand such things.

In late January, we wrote a post on the homebuyer tax credit because many consumers were complaining about just how long it was taking to receive their check. The reason for the delay? Due to rampant fraud surrounding the program, the IRS decided to change the documentation it required in order for homebuyers to receive their “credit.”

A short paragraph in the latest Kiplinger Tax Letter points to the fact that the IRS still doesn’t have the fraud problem under control. Furthermore, this item also provides some very definitive answers to the questions: “Is the homebuyer tax credit a loan? Is it a credit? Is it a one-time check for a couple grand? Does it ever have to be repaid?

According to the tax letter: “The IRS has a new way to police the recapture of the home buyer credit: It will check public databases of real estate sales. If a person buys a home between Jan. 1, 2009 and April 30, 2010 and sells within three years, the tax credit is [repaid to the IRS]. The $7,500 credit for purchases between April 9 and Dec. 31, 2008 is recouped over 15 years, but the remaining balance is due if the home is sold early.”

By this reckoning, if you bought a home in 2008, you got more of a loan than a credit. Ironically, the IRS agrees (emphasis added):

For 2008, the credit applies to a principal residence purchased by the taxpayer after April 8, 2008, and on or before December 31, 2008. Homebuyers who qualify are allowed a one-time credit against their income tax for the year of purchase. Unlike some past credits, this one must be repaid over a 15-year period. As a result, the new tax credit works like an interest free loan. You take the full credit on your 2008 return, and then repay the credit amount in equal payments over 15 years, with no interest charges.

If you bought a home between January 1, 2009 and April 30, 2010, you don’t have to repay it, provided that you hold your home longer than three years, otherwise your credit must be repaid in full:

The obligation to repay the credit arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.

Here are two scenarios of what will happen if you sell your home (purchased in 2009 – 2010) within three years of receiving the tax credit:

Example 1: Taxpayer, a first-time homebuyer, purchases a home for $100,000 in 2009 and claims an $8,000 first-time homebuyer credit. In 2011, the taxpayer sells his home for $120,000. He has no adjustment to basis. The taxpayer must pay an additional tax of $8,000 for 2011.

Example 2: Assume taxpayer in example 1 sold his home to an unrelated person for $98,000 in 2011. He has no adjustments to basis. To determine the amount of gain for recapture purposes, the taxpayer’s $100,000 basis is reduced to $92,000 by the $8,000 credit. His gain for this purpose is $6,000 ($98,000 amount realized minus $92,000 basis). Taxpayer must pay an additional tax of $6,000 for 2011.

While we aren’t tax experts, if you have any questions regarding the tax credit, you can submit them in the comment section of this post, or click the “contact us” link in the top-right portion of the page, and we’ll do our very best to answer them.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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