Q. Do I need to repay the credit if I purchased my home and claimed the credit in 2008?
A. The Housing and Economic Recovery Act of 2008 provided a refundable tax credit to qualified first-time homebuyers purchasing a main home in the United States after April 8, 2008, and before January 1, 2009.
If you claimed and received the one-time credit on your income tax return for 2008, you must repay the credit. It is repaid as an additional tax on your tax return. There are special rules for repaying the credit if the home stops being your main home.
Q. Do I need to repay the credit when my home remains my main home?
A. If your home remains your main home, you are required to repay the credit in equal payments over 15 years with no interest charges. To repay the credit, you must attach a completed Form 5405 to your tax return each year beginning with the second tax year after you received the credit. For most people, this is the 2010 tax return that you file in 2011. This repayment increases the amount of income tax you owe. You continue to make annual payments with your tax return until the credit is repaid in full. Read the section below for what you need to do if the home stops being your main home.
The IRS calls the repayment period the “recapture period.” The amount repaid each year is one-fifteenth, or 6 2/3%, of the credit for each taxable year in the 15-year recapture period, which begins with the second taxable year following the year of purchase. To find out how much you need to repay each year, take the amount of your credit and divide it by 15. For example, if you received the maximum credit of $7,500, divide $7,500 by 15, which equals $500, and add the $500 to your income tax each year for 15 years. If you received a credit of $6,000, divide $6,000 by 15, which equals $400, and add the $400 to your income tax each year for 15 years.
In the fall of 2010 or the first year after you claim the credit, and every year until the credit is repaid, the IRS will send you Notice CPO3a, Repaying your First-Time Homebuyer Credit. This notice lists the amount of the credit you received and the amount you have to repay as additional tax.
Q. Do I need to repay the credit when my home stops being our main home?
A. If you received the credit for a home purchased in 2008 and the home stops being your main home, you may need to add the entire remaining unpaid credit amount to your income tax on your next tax return.
Q. When does my home stop being my main home?
A. Your home stops being your main home when:
- You sell the home.
- You transfer the home to a spouse or former spouse in a divorce settlement.
- You convert the entire home to a rental or business property.
- You converted the home to a vacation or second home.
- You no longer live in the home for the greater number of nights in a year.
- Your home is destroyed or condemned.
- You lose your home in foreclosure.
- You die.
There are certain exceptions, but generally, if the home is no longer your main home. you must repay the entire remaining part of the credit on your next tax return. The IRS calls this “acceleration of recapture.”
Q. What are the exceptions where I may not have to repay the full credit?
A. The exceptions where you may not have to repay the full credit are:
- If you (transferor spouse) transfer your home as part of a divorce settlement, your former spouse (transferee spouse) who keeps the home is responsible for making the rest of the repayments and you are not responsible for making any remaining repayments.
- If your home is destroyed, condemned or disposed of under threat of condemnation and you purchase a replacement home within two years, you continue to repay the credit in installments each year if the disposition results in a gain. If the disposition results in a loss, no repayment is required. (Please see the instructions for Form 5405, Repayment of the First-Time Homebuyer Credit, Part II: Repayment of the Credit, for more information.)
- If you lose your home in a foreclosure sale, you repay the credit only up to the amount of the gain.
- If you die, no further repayments are due. If you claimed the credit on a joint return, your surviving spouse pays only his or her half of the remaining credit repayment amount.
- If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain, if any, on the sale. Note: when calculating gain or loss on your main home if you received the credit, you reduce your basis by any remaining amount of the credit. See Publication 551, Basis of Assets, for more information.
Q. When must I pay back the credit for the home I purchased in 2008?
A. For homes purchased in 2008, the first-time homebuyer credit is similar to a 15-year interest-free loan. You must begin repaying the loan the second year after claiming the credit. It is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed.
For example, if you properly claim the maximum available credit of $7,500 on your 2008 federal tax return, you must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on your 2010 federal tax return. Normally, $500 will be due each year from 2010 to 2024.
There are a number of exceptions that apply to the repayment rule. Please see Form 5405 and its instructions; review the first-time homebuyer credit section of Publication 17, Your Federal Income Tax for Individuals; or consult your tax professional.
Q. For homes purchased in 2008, how will the IRS know if someone sells their residence before the 15 years are up?
A. Through both self reporting and third-party information.