The First-Time Homebuyer Tax Credit
Repaying the 2008 Federal Tax Credit for First-Time Homebuyers
The first-time homebuyer tax credit ended in 2010, at least for most taxpayers, but it still applies to those who purchased homes in 2008, 2009, or 2010. Taxpayers who took the credit on their federal income tax returns in 2008 are obligated to repay the tax credit over 15 years beginning with their 2010 tax returns. They'll have to make payments until 2025.
The credit was fully refundable. Eligible taxpayers were able to obtain an additional federal tax refund of up to $7,500 in 2008 even if they had no other tax liabilities, so it was a very advantageous credit indeed. But those who took the credit in that one year are obligated to repay it.
The History of the First-Time Homebuyer Credit
The credit was worth up to $7,500 for homes purchased in 2008, or $3,750 for married individuals who filed separate returns. It then increased to an $8,000 limit for homes purchased from January through November of 2009, and to $4,000 for married couples filing separately.
The requirement to repay the credit was repealed for homes purchased after 2008. Congress then renewed this version of the credit from December 2009 through April 2010.
Congress acted to offer a reduced credit of up to $6,500 to "long-term" residents buying their own homes, more or less simultaneously with renewing the credit for those five months from 2009 through 2010. The limit was $3,250 for married couples who filed separate returns. The effective period of this credit lasted from November 7, 2009, through April 2010. This credit doesn't require repayment.
Qualified members of the U.S. Armed Forces remained eligible for the credit through April 30, 2011. Those serving in the U.S. military, the intelligence community, or Foreign Service on official extended duty outside the U.S. had an additional year to qualify for the homebuyer credit.
What Is a Primary Residence?
The tax credit applied to primary residences only. A primary residence is one where you lived most of the time. It can be a house, a condominium, a co-operative apartment, a mobile home, or even a houseboat.
Because the tax credit was designed for those purchasing a primary residence, taxpayers could qualify even if they owned a vacation home or rental property, provided that those properties were not their primary residences for at least three years preceding the purchase of their new residences.
Calculating the Tax Credit and Other Rules
The tax credit was equal to 10% of the purchase price of your home. No tax credit was allowed if the purchase price of the home exceeded $800,000.
A first-time homebuyer was defined as someone who did not own a primary residence in the three-year period that ended on the date of purchasing the home. Married couples were considered first-time buyers if neither spouse owned a residence in the previous three years. They were disqualified if one of them did.
Long-term residents were defined as those who owned and lived in their residences for at least five consecutive years in the eight-year period that ended on the purchase date of the new property.
Income Phase-Out Range
The credit was initially phased out for individuals with modified adjusted gross incomes (MAGIs) of between $75,000 and $95,000. The phase-out range was $150,000 to $170,000 for married couples filing joint returns. Then, effective November 6, 2009, the phase-out ranges started at $125,000, or $225,000 for married couples.
Repaying the First-Time Homebuyer Credit
The homebuyer credit is repaid as an additional tax on your federal tax return if you bought your home and qualified in 2008. It must be repaid at the rate of 6 2/3%, or 1/15 of your credit amount. This works out to annual repayments of $500 per year if you received the maximum $7,500 credit. Think of it like an interest-free 15-year loan.
Repaying the credit requires filing a tax return even if you wouldn't otherwise be required to do so. The payment is entered on line 7b of Schedule 2 for the 2019 tax year, the return you'll file in 2020. The total from Schedule 2 is then transferred to line 15 of your Form 1040 tax return.
When You Must Repay in Full
The credit must be repaid in full, in one lump sum equal to the balance, if you sell a home that was purchased in 2008 at any time within the 15-year repayment period. This involves preparing and filing Form 5405 which will calculate how much you owe. The Internal Revenue Service provides instructions for completing the form on its website.
You do not have to submit Form 5405 if you're making one of your 15-year annual repayments and you still own the home. This form is only for use if you sell the property.
You can then report the repayment amount on Form 1040. You don't have to file Form 5405 when you make an installment payment.
The credit must be repaid in full or in part if the property ceased to be your primary residence within 36 months of the date you purchased it if you bought your home to qualify for the credit in 2009, 2010, or 2011. Your repayment is limited to the amount of any gain you realize if you lose your home in foreclosure.
Calculating the repayment in the event of foreclosure can be complicated, so you might want to seek the help of a tax professional.
The surviving spouse is responsible for only one half the repayment balance if you and your spouse purchased the home and claimed the credit together, and if one of you subsequently dies before the 15-year period ends. The portion owed by the deceased spouse is effectively erased.