Here in America, we view the housing market as one of the main pillars of the economy. As a result, when the real estate market moves slowly, our leaders are concerned about what could happen to the economy. This was a big concern in late 2007 and early 2008 as signs of a housing meltdown really began manifesting. Even before the financial crisis, leaders were trying to prevent a real estate market collapse, and they began offering a first-time homebuyer tax credit to encourage citizens to buy homes.
Homebuyer Tax Credit 2008: Not a True Tax Credit
It is important to note, though, that the homes bought between April 8, 2008 and December 31, 2008, do not actually qualify for a true tax credit. In fact, the “tax credit” was a no-interest loan from the government. First-time homebuyers could get a tax credit of $7,500 or 10% of the home purchases price (whichever was smaller). There was a catch, though. Starting with tax year 2010, those taking advantage of the 2008 first-time homebuyer tax credit have to start repaying the loan.
In actuality, the 2008 “tax credit” is a loan to be repaid over the course of 15 years. So, if you bought your first home, and you qualified for the $7,500 credit, you have to start paying $500 a year with your taxes. For many, this unexpected expense will put a strain on finances. You might have to consider an IRS payment plan to ease the burden if you can’t pay what you owe this year. For next year (and the subsequent years), it might be wise to adjust your withholding to account for the $500 repayment. The repayment basically costs $41.67 a month if you plan ahead, deciding to set aside — or withhold — more money to avoid the strain of coming up with the money all at once.
True Tax Credit: 2009 and 2010
By contrast, the homebuyer tax credits offered in 2009 and 2010 are true credits. If you qualify for these tax credits, you do not have to pay them back. Additionally, it was not a requirement to be a first-time homebuyer. You could get up to $8,000 as a first-time homebuyer and up to $6,500 as an existing homeowner buying something else.
Even though these later tax credits are true credits, there are circumstances in which you would have to repay what you received. If you don’t maintain your new home as a primary residence for at least 36 months, you have to repay the government for the tax credit. There are some exclusions to this rule, as well as situations in which you would repay the credit on a pro-rated basis. Consult with a tax professional if you need more information about whether you are on the hook for repaying your homebuyer tax credit.
If you bought your home in 2008, and qualified for the homebuyer tax credit, you have to begin repaying the credit, since it was actually a loan. You can use the revised 2010 version of Form 5405 to file along with your tax return as you begin repaying your credit. Claiming the credit for 2009 or 2010 also requires the Form 5405. You will also have to include documentation related to your home purchase (be aware that you must file paper forms and you cannot efile due to the backup you must provide for your home ownership).