When do you not have to repay your new homeowner credit? How stop paying back the New Homeowner Credit!!

When do you not have to repay your new homeowner credit?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-687-9900 x101

Fortunately, you may not have to repay the New Homeowner credit if you purchased a home in 2008 and sold the home at a loss!

I have one client (who I will call “Joe”) who purchased a home in October 2008 for $305,000, and claimed a $7,500 first-time homebuyer credit on his 2008 return. Joe understood that he would have to repay the $7,500 over 15 years. Joe would be paying all the way until 2024 since Joe did not have to start repaying the tax until 2010.

Joe’s repayments began on his 2010 tax return. In this case, $500 ($7,500 tax credit over 15 years) was being repaid on his 2010 and 2011 personal tax returns. On July 7th of this year, Joe sold this home for $203,000. Joe asked me if he still had to pay the balance of $6,500 ($7,500 less the $1,000 paid back on his 2010 and 2011 tax returns over the next 13 years).

When doesn’t the credit have to repaid?

If the home is sold before the 15-year period ends, any remaining
credit is repaid in the year of sale. Repayment is limited to
the gain from the sale (unless sold to a
related person), determined by reducing
the home’s basis by the credit not already
repaid.
• Repayment isn’t accelerated if the residence
is involuntarily converted and the taxpayer acquires a new
principal residence within two years.
• Repayment ends if the taxpayer dies, so none is due in the year
of death or any future years. If a joint return was filed when the
credit was claimed, the surviving spouse would only have to
repay his half of the remaining credit. (IR 2008-106)
• Repayment isn’t required if the home is transferred between
spouses or between former spouses incident to a divorce. For
tax years ending after the transfer, the transferee spouse (and not
the transferor spouse) is responsible for remaining repayment.
• The repayment can’t be offset by the taxpayer’s nonrefundable
personal credits.

If Joe had been able to predict the future, he would have waited until 2009 to 2011 to have purchased his first home. Why? The credit does not have to be repaid, unless the taxpayer sells or otherwise stops using the home as a principal residence within 36 months beginning on the date of purchase. Then, the credit is repaid in the year of sale. If the home is sold to an unrelated person, the repayment is limited to the gain on the sale.

From the IRS Website:

Where do you report the repayment? A repayment is computed in Parts
III and IV of Form 5405 and carried to line 59b of Form 1040 if: (1)
the home was disposed of or ceased to be a principal residence
in 2011 or (2) the home was purchased in 2009, destroyed or sold
through condemnation in 2009, and has not been replaced within
two years of the event. In all other situations (for example, credit
repayment for a home purchased in 2008), repayment is reported
directly on Form 1040, line 59b.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com