First Time Homebuyer Credit Program; Paying It Back

Now that the housing market is favorable to sellers throughout most of the country, homeowners who purchased their homes at the bottom of the market are thinking of cashing in. A lot of these homeowners may have taken advantage of the government’s First Time Homebuyer Credit Program, and may be in for a surprise when they sell their homes – the government may require the full repayment to the program, due after the sale of your home!

As you may or may not remember, the housing market in 2008 was in quite a slump, the type of slump that sent lawmakers scrambling to find ways to get the housing market back on the right track. From April 2008 to May 2010, many first-time home buyers received either a $7,500 or an $8,000 tax credit (unless two married individuals are filing separate returns). To be considered a first-time homebuyer at the time, the buyers were not allowed to have owned another principal residence at any time during the three years prior to the date of the purchase of the new home.

The First Time Homebuyer Credit Program was eligible to buyers who purchased their homes between April 8th 2008 and May 1st 2010. Depending on the year, the buyer would have received a different tax credit amount in the form of an interest free loan, but this tax credit wasn’t as simple as it sounded. However, buyers who received the tax credit must repay the credit back to the federal government within 15 years of receiving the credit. A good analogy for the program is receiving a gift card from a family member or a friend on a special occasion but with a note stating that “whatever you buy, remember to hand it over to me in a couple years. Enjoy!”

As a homebuyer who took advantage of the First Time Homebuyer’s Credit, you have been slowly paying back the government (at a minimum of 1/15th of the tax credit per year). If you are selling your home this year and you have not fully repaid the tax credit, then you owe the remaining balance next tax year – in other words, everything becomes due the moment you sell your home.

However, please note that some of the credits have to be paid back under certain circumstances – and some don’t. For example, you have to repay the credit if: you sold your main home to a related person or entity, you converted the entire home to a rental or business property, your home was destroyed or disposed of under threat of condemnation and you didn’t purchase or rebuild a home within two years, you converted the home to a vacation home, or if you no longer live in the home for the greater number of nights a year. The 2008 tax credit was required to be repaid over time (15 years) – or after the property is sold if repayment is not yet fulfilled. Then in 2009, legislation passed offering the homebuyer tax credits for the next two years that removed the repayment requirement – unless the property was no longer your primary residence or the home was sold within three years. Additionally, there are exceptions such as if you sold your house to someone that you are not related to, then you only have to pay the credit back limited to the amount of your gain of selling your house. Same thing if your home is foreclosed on.

Given the complexity of the issue, we recommend that you check out the IRS site on this issue if you received the first-time homebuyers credit and are considering selling your home. Tax consideration is just one facet of the selling process, make sure you have a top local listing agent on your side.