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Homebuyer tax credit claims and payback

Taxes » Tax Credits » Homebuyer Tax Credit Claims And Payback

The first-time homebuyer tax credit has made it possible for many people to own a house.

The original first-time homebuyer tax credit provided buyers with a tax credit of up to $7,500. The tax break subsequently was expanded, with a new credit limit of $8,000 for first-time homebuyers and $6,500 for homeowners seeking to move into another residence.

But as with all things tax, in order to get the most of this tax benefit, homeowners must follow the Internal Revenue Service rules.

Paying back the 2008 tax year claim

The original first-time homebuyer tax credit was not a true credit. Rather, it essentially was an interest-free loan from Uncle Sam, and every loan has payback terms. In this case, the credit is to be repaid in 15 equal payments of $500 each tax-filing time, beginning with 2010 returns.

The first tax year that this credit was repaid, you had to complete Form 5405 and transfer the appropriate payment amount to your Form 1040. You'll continue to repay the credit each filing season until it's paid off, but you might not have to file a Form 5405 for future payments.

If you bought the home in 2008 and owned and used it as your main residence for all of 2012, you can enter your 2012 repayment directly on line 59b of Form 1040 without attaching Form 5405.

Lump-sum payback triggers

Nowadays, however, few people stay in the same house for 15 years, so the IRS devised a way to get the original homebuyer credit back from those folks.

When you quit using the home as your main residence, for example by selling or renting the property, then you have to pay the balance of the $7,500 credit in full when you file the tax return for the year in which your living arrangements changed.

There are some exceptions -- what the IRS calls disposition situations -- which could get you off the lump-sum repayment hook.

  • You transfer your home as part of a divorce settlement. Your former spouse then is responsible for making the rest of the repayments.
  • Your home is destroyed, condemned or disposed of under threat of condemnation. If you buy a replacement home within two years, you can continue to repay the credit in annual installments.
  • If you die, any remaining annual installments are not due. However, if the credit was claimed on a joint return, the surviving spouse pays only his or her half of the remaining credit amount.

And if you sell the house on which you claimed the $7,500 credit, your profit will determine how much you must pay back. When you sell, either by your choice or as part of a foreclosure, you only have to repay the credit up to the amount of the gain on the sale, if any.

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