The First-Time Homebuyer Tax Credit
Repaying the 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. That means 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.
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 $4,000 for married couples filing separately. For homes purchased after 2008, the requirement to repay the credit was repealed at this time. Congress then renewed this version of the credit from December 2009 through April 2010.
Somewhat simultaneously with this renewal, Congress acted to offer a reduced credit of up to $6,500 to "long-term" residents buying their own home. The limit was $3,250 for married couples filing separate returns. The effective period of this credit lasted from November 7, 2009, through April 2010. This credit doesn't require repayment either.
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.
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 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.
When You Must Repay in Full
The credit must be repaid in full, in one lump sum equal to the balance, if you sell your home that was purchased in 2008 at any time within the 15-year repayment period. It 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 can then report the repayment amount on Form 1040. You don't have to file Form 5405 when you make an installment payment.
If you bought your home to qualify for the credit in 2009, 2010, or 2011, 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 lose your home in foreclosure, your repayment is limited to the amount of any gain you realize. Calculating this can be complicated so you might want to seek the help of a tax professional.
If you and your spouse purchased the home and claimed the credit together and one of you subsequently dies before the 15-year period ends, the survivor is responsible for only one half of the repayment balance. The portion owed by the deceased spouse is effectively erased.
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, co-operative apartment, houseboat, or mobile home.
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 residence 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 percent 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 is 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 are considered first-time buyers if neither spouse owned a residence in the previous three years.
Long-term residents are 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 of between $75,000 and $95,000. The phase-out range was $150,000 to $170,000 for married couples filing a joint return. Then, effective November 6, 2009, the phase-out ranges started at $125,000, or $225,000 for married couples.
IRS. “Topic No. 611 Repayment of the First-Time Homebuyer Credit.” Accessed Aug. 6, 2020.
Congress.gov. “H.R.1 - American Recovery and Reinvestment Act of 2009,” Page 123 STAT. 316. Accessed Aug. 6, 2020.
Govinfo. “Public Law 111 - 92 - Worker, Homeownership, and Business Assistance Act of 2009,” Page 123 STAT. 2989. Accessed Aug. 6, 2020.
IRS. “First-Time Homebuyer Credit Extended to April 30, 2010; Some Current Homeowners Now Also Qualify.” Accessed Aug. 6, 2020.
IRS. “Instructions for Form 5405, Repayment of the First-Time Homebuyer Credit,” Pages 1-2. Accessed Aug. 6, 2020.
IRS. “Form 5405, First-Time Homebuyer Credit,” Page 1. Accessed Aug. 6, 2020.
IRS. “Tax Credits for Home Buyers.” Accessed Aug. 6, 2020.
IRS. “Part 21. Customer Account Services.” Accessed Aug. 6, 2020.