By RJ McArthur, CPA , EKS&H – Ehrhardt, Keefe, Steiner & Hottman PC
In an attempt to help stimulate sluggish home sales, Congress provided a federal tax credit to certain qualified homebuyers who purchased a principal residence after April 8, 2008, and before May 1, 2010. This credit was extended through May 1, 2011, for certain members of the uniformed services on extended duty. It has been almost two years since the program was available for most first-time homebuyers, and many people have forgotten about the benefit they received.
More importantly, many people have forgotten about the strings that were attached to the original benefit. As is the case with many federal tax credits, what the government giveth, the government can taketh away. This is especially true for credits earned on homes in 2008 but can also be true for other homes purchased that qualified for the credit.
In this article we will discuss the differences in the credits that were provided by Congress, what a homeowner needs to know even years after the program has ended, and what a homeowner can do to minimize or eliminate the possibility that the government comes to take the credit back.
The First-Time Homebuyer Credit (FTHBC) can be divided into two distinct categories: credits on residences purchased before January 1, 2009, and credits on residences purchased after December 31, 2008.
- Homes purchased in 2008 – For qualifying homes purchased in 2008, the FTHBC must be recaptured (repaid by the homeowner) over 15 years, with payments starting in 2010. In essence, the credit was really an interest-free loan that had to be repaid over 15 years starting two years after the purchase of the home. The repayment is made by increasing the income tax of the homeowner by 1/15th of the credit for tax years 2010 through 2024. If the home is disposed of or of it ceases to be the primary residence of the homebuyer, the repayment of the credit is accelerated into the year of the disposition or when the home is no longer the primary residence.
- Homes purchased after December 31, 2008 – For homes purchased after December 31, 2008, that qualified for the FTHBC, the rules are much more lenient. For these purchases, the credit only has to be repaid if the home is disposed of or it ceases to be the homebuyer’s personal residence during the 36-month period beginning on the date of the homebuyer’s purchase of the principal residence for which the credit is allowed. Therefore, if the homebuyer maintains the home as their personal residence for at least 36 months, they will never have to repay the credit back to the government.
Homebuyers are encouraged to talk to a tax professional before making any changes are made to the status of the home as a principal residence.