Welcome to the TheFieldsTeam.com Blog

2012-02-27 12:20:06
Do you have to pay back home buyer tax credit?

In the last few months, I have been repeatedly asked with an ever increasing frequencey is 'What happens if I received the federal Home Buyer tax credit but I need to sell/rent my home before I have lived it in for three years?'

Paying back federal first time home buyer tax credit, Utah Home Buyer Tax Credit, Provo Utah Real Estate, Provo Utah Realtor, Provo Utah Homes

The purpose of this article is to provide some information for all of you that have received the home buyer tax credit and are contemplating selling/renting that home during the 3 year required primary residence period. Before going any further, I have to state and disclose that I am not a CPA or any other sort of tax professional, and should not be relied on exclusively for any tax advice. If you received the home buyer tax credit and are seriously consideirng selling/renting your home, you should seek out the advice and counsel of a CPA or tax specialist. 

Most of the information in this article was taken from the following two IRS tax forms, an MSN Real Esate Article titled 'Do you have to repay your home buyer tax credit?' (Nov. 2010) and by speaking with two tax professionals that I know personally:

http://www.irs.gov/pub/irs-pdf/f5405.pdf  - This is 5045 IRS form used when a tax payer sellls a home within three years of receiving the tax credit after buying that home. 
http://www.irs.gov/pub/irs-pdf/i5405.pdf - This is the introduction to IRS 5045 form with instructions on how to use IRS form 5045. 

http://realestate.msn.com/article.aspx?cp-documentid=26151975 - MSN article.

First of all, there were different versions of the Federal Home Buyer Tax Credit:

'First version, 2008: The original credit was for as much as $7,500 for individuals who bought a principal residence in the U.S. between April 9 and Dec. 31, 2008, and who had not owned one for three years prior to the purchase date.' 

'Second version, 2009 and 2010: Congress increased the credit to as much as $8,000 for individuals who bought a principal residence between Jan. 1, 2009, and April 30, 2010, and who had not owned one within three years of the purchase date. The closing deadline was extended to June 30 for homes that were under contract as of April 30. The deadline was extended again to Sept. 30 for homes that were under contract as of April 30 and did not close by June 30 as planned.' 

'Third version, 2009 and 2010: This credit offered as much as $6,500 to homeowners who had owned a principal residence in the U.S. for at least five consecutive years in the eight years before the purchase of a new principal residence. The purchase date had to be between Nov. 7, 2009, and April 30, 2010. The closing deadline was extended to the same dates as the second version.' 

 

The requirements/rules for repayment for the first version are different than those for the second and third versions (which are the same). Although very few if any of my clients fall under the first version, I will still cover it's requirements/exceptions for repayment as it is helpful to understanding the requirements/exceptions of the second and third versions. 

Repayment rules for first version
'Buyers who claimed the 2008 version of the credit generally must repay the credit in equal installments in the next 15 years, starting with their 2010 tax return.'

'Example: Say you claimed a $7,500 credit for a $200,000 purchase in 2008. You generally must add $500, one-fifteenth of $7,500, to the tax bill shown on your 2010 Form 1040. If you continue to own the home, you'll do the same thing for the next 14 years. If you sell this year, however, you'll have to repay the $7,500 credit or your 'gain on sale,' whichever is smaller.'

'To calculate your gain on sale, subtract the credit from the purchase price, and then subtract that from your 2010 sale price. In this example, if you sold the home in 2010 for $195,000, you must repay the $2,500 gain. That's because the $195,000 sale price exceeds your home's $192,500 cost basis ($200,000 actual cost minus the $7,500 credit).' 
Although this article does not state so, my understanding is that you are allowed to subtract the expenses of selling the home from the purchase price, including commissions and closing costs (see IRS tax form 5405). In addition, money put into the home in the form of upgrades, remodeling and improvements can also be subtracted from the sales price (confirm with your tax professional).
'Exceptions: If you or your spouse is in the military and had to sell because of an order to relocate for extended duty, you don't have to repay the credit. If you transfer the home to your former spouse as part of a divorce settlement, the credit-repayment obligation becomes your ex's problem. Finally, neither people who die nor their heirs have to repay the credit.'

Repayment rules for second and third versions
'If you claimed a credit for a 2009 or 2010 purchase, the 15-year repayment rule doesn't apply. But if you sell the home or stop using it as your principal residence this year, you generally must repay the full credit or your gain on sale, whichever is smaller. If you have a loss, you don't have to repay the credit. Gain on sale is calculated the same way as in the first version.'

'Exceptions: For post-2008 purchases, the credit-repayment obligation disappears after you've owned and used the home as your principal residence for more than three years. In addition, the credit-repayment exceptions in the first version of the credit also apply to the second and third versions.' 

Also, another piece of information I have taken from the IRS 5405 forms is that the property MUST remain as the buyer's primary residence for the three years. If renters are put in, or if the buyer's simply move out, that triggers these repayment requirements. Again, this information should all be confirmed with your CPA or tax specialist who would be filing these IRS forms for you. 

In general, the homes that were purchased in 2009 and 2010 that qualified buyers for the home buyer tax credit have NOT appreciated in the past 2-3 years; most in fact have depreciated. So for most home buyers who bought a home in the past 2 to 3 years in Utah County and had to sell their home now for whatever reasons, most would be selling for less than what they purchased, even with the tax credit subtracted from the original purchase price. For the few who could sell their home for more, thankfully, buyers are allowed to subtract their expenses of selling the home (commissions and closing costs). 

So if a home buyer had to sell now, as long as the numbers result in a net loss, they would not have to pay back the tax credit. 

Example 1:

You bought a home in early 2010 for $200,000 and received the $8,000 tax credit. That leaves an actual cost basis of $192,000. You put 20% down and had a final loan amount of around $162,000.

During the Spring of 2012, you were relocated out-of-state and had to sell the home.  After two years, you had paid the loan down to $153,000. The home brings in an offer of $195,000, and commissions and closing costs come to $12,000. The net sales price is $183,000. Becuase it is below the actual cost basis of the purchase at $192,000, you wouldn't have to pay any of the tax credit back and you could pull your $30,000 of equity out of the home. 

Example 2:

You bought a home in early 2010 for $200,000 and received the $8,000 tax credit. That leaves an actual cost basis of $192,000. You put 5% down and had a final loan amount of around $192,000.

The home purchased was a short sale in horrible physical condition, and was purchased for $20,000 below market value due to the distressed and physical condition of the home. You put an additional $15,000 of improvements and remodeling into the home.

During the Spring of 2012, you were relocated out-of-state and had to sell the home.  After two years, you had paid the loan down to $185,000. The home brings in an offer of $220,000, and commissions and closing costs come to $14,000. The net sales price is $220,000, minus $14,000 (commissions and closing costs), minus $15,000 (improvements), for a total of $191,000. Becuase it is below the actual cost basis of the purchase at $192,000, you wouldn't have to pay any of the tax credit back and you could pull your $6,000 of equity out of the home. 


Example #3

You bought a home in early 2010 for $200,000 and received the $8,000 tax credit. That leaves an actual cost basis of $192,000. You put 5% down and had a final loan amount of around $192,000.

The home purchased was a bank owned foreclosure that needed a little work, and was purchased for $20,000 below market value due to the minor work that needed to be done and you just got a great deal by  jumping quickly on this listing. You put an additional $5,000 of improvements and remodeling into the home.

During the Spring of 2012, you were relocated out-of-state and had to sell the home.  After two years, you had paid the loan down to $185,000. The home brings in an offer of $212,000, and commissions and closing costs come to $13,000. The net sales price is $212,000, minus $13,000 (commissions and closing costs), minus $5,000 (improvements), for a total of $194,000. Becuase it is ABOVE the actual cost basis of the purchase at $192,000, you would have to pay back $2,000 of the credit, but also pull out the $7,000 in equity, for a net of $5,000 (after the pay back of the credit).

I hope this information helps. Feel free to bring any questions about this article to me, but you should speak with your tax professional before making any decisions with your property.

For any and all of your real estate needs, don't hesitate to contact me anytime. Thanks and have a great day! 

 
Blog Archive
2017-05-16 23:10:54
'Wonder Woman' Confirmed Seat Reservations List

2017-03-07 18:03:50
6th Annual Easter 'Egg'stravaganza April 15th!!

2017-03-07 11:05:49
6th Annual ESPN Bracket Challenge $2500 in prizes!

2017-03-03 18:11:34
Easter Event (2017) Registration Confirmation

2017-02-03 14:44:08
Open House, Seminar, Easter Event and more!

2017-01-24 23:14:33
FREE Real Estate Seminar & Workshop!

2017-01-19 11:46:00
2017 1st Quarter Current Market Analysis and Trend

2017-01-04 13:26:33
THANK YOU from our Sub for Santa Families

2016-12-20 12:10:25
Star Wars Rogue One Event Photos!

2016-12-16 13:11:11
Sub for Santa Delivery Schedule!

2016-11-29 13:27:24
Star Wars: Rogue One Client Appreciation Event!

2016-11-29 12:08:17
Star Wars: Rogue One - Confirmed Seat Reservations

2016-11-28 14:50:34
Appreciation Event: PHOTOS WITH SANTA!

2016-11-23 13:33:41
Our SUB-4-SANTA families and fundraiser for 2016!

2016-08-30 13:35:40
Upcoming Events, Market Update, new Team Member

2016-07-05 10:42:31
2nd Quarter 2016 Market Analysis and Results

2016-06-14 14:47:50
Seat Reservation List - Finding Dory- Updated 6/14

2016-05-02 11:14:10
2016 1st Quarter Market Analysis

2016-04-18 19:44:43
Seat Reservation List - 'Finding Dory'

2016-04-18 19:44:31
Seat Reservation List - 'Captain America'

2016-04-05 10:58:25
Winners of our 5th annual Bracket Challenge!!

2016-03-21 11:42:21
Tournamnet Challenge Bracket Update 3/21

2016-03-14 15:21:58
Easter Event Fundraiser for the Dunn Family

2016-03-14 10:05:52
5th Annual Easter 'Egg'stravaganza Event!

2016-03-14 09:55:56
Pizza and Egg Stuffing Paty

Click here to see ALL articles.


Comment on this Article

Your Name:
Your Email:
Comments:
Verify:  Please enter the numbers shown to help eliminate spam.