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Are You on the Hook for Repaying Your Homebuyer Tax Credit?

by Miranda Marquit

In the wake of the financial crisis and the housing market crash, there were a number of efforts made to prop up the failing market. Among these efforts were tax credits for homebuyers, encouraging them to buy homes. However, not all the tax credits were created equal; in some cases, homeowners may be on the hook for repaying the tax credit.

First Time Homebuyers in 2008

A plan to provide first time homebuyers with a tax credit in 2008 has been the source of great confusion. This tax credit amounted to 10% of the home’s purchase price or $7,500, whichever number was smaller. However, rather than being a true tax credit, this first time homebuyer tax credit was actually a loan. The government fully expects that you will pay back this tax credit over the course of 15 years. There is no interest on this loan, but if you bought your home between April 8, 2008 and December 31, 2008, you are required to begin repaying the tax credit with your 2010 taxes.

As you probably know, waiting until 2009 would have resulted in a much better deal: a true tax credit.

Homebuyer Tax Credits in 2009 and 2010

First-time homebuyers, and those in existing homes that met certain conditions, were able to take advantage of different tax credits in 2009 and 2010. Buying a home on January 1, 2009 through April 30, 2010 created an opportunity to get a tax credit that would not have to be paid. (The settlement date to meet was September 30, 2010.)

You can claim your tax credit on your 2010 taxes. You might have to pay it back, though, if you do not maintain the home as a primary residence for 36 months. So, if you move out, you become responsible for repaying the government for your tax credit. There are some exclusions to this, though:

  • Military, intelligence or foreign services personnel who are required to live in government quarters or are moved to a duty station more than 50 miles away.
  • Home damage that is involuntarily — but you have to buy a new home within two years.
  • Home sold to someone who is unrelated to you. You have to repay a portion of the tax credit, up to the gain on the home’s sale.
  • Death of the homeowner within 36 months. However, a surviving spouse will have to pay half the credit is he or she moves out.
  • In divorce, the spouse who retains the home is responsible for the credit repayment if he or she moves out within 36 months.

It is worth noting that these exclusions apply to the repayment of the 2008 tax credit as well.

Filing for a Homebuyer Tax Credit

For those taking the homebuyer tax credit, Form 5405 will need to be filed along with your tax return. For those repaying the 2008 credit, it is necessary to make sure you are filing the revised 2010 version of Form 5405. When claiming the credit for 2009 or 2010, you will need to supply additional documentation with your tax return, including a copy of your settlement statement (HUD-1 form). Other documentation may needed, depending on your situation, including Form 1098, tax records, insurance records or copies of signatures from your purchase contract. Consult with a tax professional to see what documentation you might need. And realize that, due to the documentation requirement, you cannot e-file your tax return if you are taking this credit. You can get more information from IRS.gov.


Published or updated December 17, 2010.
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{ 4 comments… read them below or add one }

1 The College Investor

I just received a letter from the IRS that said the same thing. I think that they will be following up big time to make sure that people aren’t trying to pocket the tax credit and run!

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2 krantcents

I don’t see anything wrong with that! The only problem I see is the difficulty in reporting it (that it can not be done electronically).

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3 Mark Wallstead

@krantcents I agree, reporting is the main problem.

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4 chris

No the problem with it is they didnt explain the repayment plan to those who bought houses in 2008 and now they are going to make them repay and not the people from 09 or 10?!?!?!?! The tax “credit” was the exact same…..except the latter got more money!!!!!!!!!!

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