Repayment of First Time Homebuyer Tax Credit

Real Estate Agent with Re/Max Alliance

I wrote a post last night about the ramifications of short selling or losing a home to foreclosure when the First Time consultation Tax Credit was taken in connection with the purchase of the home.  I realize that this applies to a relatively small subset of people ... those that purchased a home during the limited time that the homebuyer tax credit was available, and now are in danger of losing the home.  For that subset of people, however, this can cause a lot of sleepless nights.  I'd like to shed a little more light on the topic.

First, let me preface by clarifying that I am, in fact, an attorney.  That said, this post is not intended to be legal advice for any particular client.  Rather, this is intended to provide general information and access to resources to help those interested better understand the issues.

Now ... a little background.

The homebuyer tax credit came into being in 2008.  At first, it only applied to first time purchasers.  The law changed in late 2008 and for 2009 and early 2010, first time homebuyers as well as repeat homebuyers that met certain requirements could claim the credit (if they closed by a certain date, and entered contract by a certain date). 

The idea was to encourage homebuying in an effort to spark the beginning of a housing recovery.  It didn't work out as planned.  Nevertheless, thousands of people took advantage of the credit.  Now, some of those people find themselves in a situation where they need to sell for one reason or another.  Prices have not improved, in most markets, and so, there is a chance that a short sale or a foreclosure is likely in these situations.

The Law provides that under certain circumstances, the credit will need to be repaid to the government.  In most cases, repayment will be required if the person who claimed the credit ceases to use the home as their primary residence within the first 36 months after purchasing it.  Thus, if there is some reason that an owner needs to move, the repayment obligation may be triggered.  

There are circumstances, however, where a sale of the home triggers only a partial repayment obligation.  If, for example, the homeowner sells the home to an unrelated third party, the repayment obligation is capped at the lesser of (a) the amount of the credit; or (b) the amount of the gain on the sale (keeping in mind that the basis in the property is reduced by the amount of the credit).

Thus, in many situations, if a homeowner short sells their home (i.e. there is no gain on the sale) and the short sale is to an unrelated third party, the homeowner will be exempt from repayment of the tax credit.  

Again, there are a lot of variables here, and consultation with a licensed attorney is recommended.  This is intended as a basic framework for better understanding the issues.  

I'd be happy to discuss the particulars with anyone who needs further assistance.

Todd. W. Hall
(602) 492-1565

Comments (2)

Stanley Stepak
Howard Hanna - Avon Lake, OH - Avon Lake, OH
Realtor - Avon Lake, Avon, Bay Village, Westlake,

Hey this is very interesting to know. I dont think people consider limits on that tax credit with certain situations like this

Feb 25, 2011 04:39 PM
Tim Lorenz
TIM LORENZ - Elite Home Sales Team - Mission Viejo, CA
949 874-2247

Many will forget ..."some reason that an owner needs to move, the repayment obligation may be triggered. " 

Feb 25, 2011 06:04 PM