The First-Time Homebuyer Credit May Need to be Repaid

The financial credits given to first-time homebuyers (FTHC) in 2008-2010 rapidly boosted home sales in our area and nationwide during the early years of the economic recession. 

The credit for homes purchased in 2008 provided up to $7,500 as an interest-free loan to be repaid in equal annual installments for 15 years.  The subsequent tax credits of 2009 and 2010 raised that amount to a maximum of $8,000 that did not have to be repaid under most circumstances.  Those circumstances, when triggered, can require full repayment of the credit, partial repayment, or none at all.  The Internal Revenue Service has guidance on circumstances that may trigger repayment of the FTHC received.

For homes purchased in 2008, repayment is required in all cases in the form of an interest-free loan over a 15 year period.  However, there are a few circumstances that can accelerate that loan repayment requirement:

• The homeowner sells her home or converts the home to a rental prior to full repayment of the tax credit received.  A. Full repayment of the tax credit is due, less any amounts that have been repaid.
• The owner has converted the home to a business and no longer resides in it as a primary residence.  A. Full repayment of the tax credit is due in the year the home is converted to a business, less any amounts that have been repaid.
• A single person bought the home and dies before full repayment.  A. The entire amount that has not been repaid is forgiven.
• A couple bought the home in 2008 and one of them dies prior to full repayment.  A. One-half of the remaining amount due is forgiven and the surviving owner must repay their half remaining due at a rate of $250 per year.
• A couple bought their home in 2008 and they divorce before full repayment.  Taxpayer A retains the home and taxpayer B no longer has legal right to the home.  A. Taxpayer B is no longer responsible for the remaining credit due and taxpayer A must repay the entire balance due over the remaining life of the loan.

For homes purchased under the FTHC in 2009 and 2010 the repayment triggers are less extensive:

• An owner converts their home to a rental or business prior to residing in it for 36 months as a primary residence. A. The entire amount must be repaid in the year of conversion.
• An owner sells their home prior to residing in it for 36 months as a primary residence. A. The entire amount of the credit must be repaid if there is a gain on the sale of the home.
• A single homeowner dies prior to owning the home 36 months. A. No repayment is required.
• Two homeowners purchase the home and owner A dies prior to 36 months.  Owner B is not required to repay the FTHC as long as they remain in the home for at least 36 months.

 Obviously, these scenarios don’t cover every circumstance, but it’s important to remember that the gift of a major incentive, whether a full credit or an interest-free loan from the government, did come with some restrictions.  The boost that came from sales during those FTHC years was worth a little restriction on the money received.  Further information can be found at www.IRS.gov.  Be sure to check with your CPA for clarification on how the repayment triggers may affect you.

Cheri Neil and Tom Crowe are a sister-brother Real Estate Team at Windermere GH LLC in Edmonds.  With over 17 years of combined experience, they special in residential real estate in southeast Snohomish County and Northwest King County.  Cheri is a licensed CPA (no longer practicing) but interested in all things related to Real Estate. They can be reached at cheri@cheriandtom.com.