If you were a first-time homebuyer and claimed the first-time homebuyer tax credit (FTHB) when you purchased your home in 2008, it is time to start paying the government back in most cases since repayment of the credit starts in the 2nd taxable year following the year of purchase. Therefore, starting with your 2010 return, you now have 15 years to pay back the credit you earned on your 2008 return. If however, you took advantage of the homebuyer tax credits later on say in 2009 or 2010, you most likely will not need to pay back the homebuyer tax credit that you received (there are certain exceptions).
2008 Homebuyer Tax Credit General Terms
The terms in 2008 when you claimed the homebuyer tax credit were that the homebuyer would need to pay back the credit. To do so, homeowners would have 15 years to pay it back and they must start paying up beginning with their 2010 tax return. For homeowners who took the maximum credit allowed, which was $7.5k, they will be paying an additional $500 each year in taxes over the next fifteen years. However, if you sold the home in 2010 or in 2010 it was not your primary home anymore, then in most cases, you must repay the whole tax credit with your 2010 tax return.
What Does This Mean Exactly For Homeowners Who Took The Credit?
If you took advantage of the credit, the $7.5k is actually just an interest-free loan. With the subsequent years 2009 and 2010 tax credits being a true credit and not a loan, there is a lot of mixed and confusing information being thrown around. The bottom line is that 2008 credit recipients will need to pay back the credit where 2009 and 2010 recipients will not, as long as you remain in their home and it stays your primary home (what you live in most of the time) for a 3 year period starting with the purchase date. For more details see Form 5405 instructions or publication 17 which will detail the exceptions.
Instructions for Repayment of 2008 Homebuyer Tax Credit
With your 2010 tax return, you must include Form 5405 and pay back the tax credit over 15 years in equal payments. This means that your tax liabilities will increase by up to $500 a year. Again, if you didn’t take the full credit then to figure out your annual repayment amount, just divide the total credit claimed by 15. Typically, the IRS will send you Notice CP03a annually as a reminder, which states the tax credit you received and what you have left to repay.
Recent IRS Update Regarding 2008 Homebuyer Tax Credit
The IRS released news a few weeks back that some taxpayers were having their refunds held due to processing issues with the homebuyer tax credit repayment. Primarily, married taxpayers (filing jointly) who filed before February 22nd are seeing some delays with refunds which the IRS has addressed or is currently addressing. The IRS also stated that taxpayers who received the credit in 2008 but have reported the sale of their home and taxpayers trying to pay back more than their annual amount ($500) are also seeing some problems. For married taxpayers (who plan on filing jointly), the IRS recommends that each spouse file their own Form 5405. For married taxpayers who had a different filing status in 2008 (where one spouse received the credit and the other did not), then only one 5405 form is required (from the spouse who received the credit).
If you haven’t filed yet for 2010 (April 18th the deadline) and you realize you need to pay a portion of the 2008 homebuyer tax credit back then you have time to make adjustments. If you did file already this year and forgot to pay back a portion of the homebuyer tax credit you claimed previously, then you will need to amend your tax return most likely. When in doubt, see the help of a tax professional such as a CPA, tax attorney, or Enrolled Agent.