If you were a first-time home buyer between April 8, 2008 and January 1, 2009, you might recall taking advantage of The Housing and Economic Recovery Act of 2008 that allowed eligible homeowners to utilize an interest-free loan equal to 10% of the purchase price of a home (up to $7,500).
The First-Time Homebuyer credit was an incentive by Congress to boost housing sales in a time when the Great Recession made it difficult to purchase a home. Those who took advantage of the credit are required to repay the government in equal installments over 15 years for the amount received.
If you’ve started paying the piper in the form of your tax returns, we’ve got everything you need to know about repaying the 2008 credit.
How Do I Repay the Credit?
Essentially, if you claimed and received the one-time credit on your income tax return for 2008, you must repay the credit. It is repaid as an additional tax on your tax return, and you’ll be paying it back every year for a total of 15 years.
To clarify, if you qualified for the maximum credit of $7,500, this means you’ll pay a yearly loan payment of $500 until the loan is repaid in full.
One way to ensure you can afford to pay the credit every year is to list an additional withholding in your paycheck. If you get paid biweekly, you can ask your employer to withhold an additional $20 per pay period, adding up to an extra $520 at the end of every year – a little more than you’ll need for the repayment on a loan for the full credit amount.
When you’re making a first-time home buyer credit repayment, you’ll use a 5405 tax form, adding the amount you have to repay to any other tax you owe on your federal tax return. There are special rules for repaying the credit if the home stops being your main home. We’ll talk more about that later.
How Do I Know How Much I Owe on My Tax Credit?
If you’re looking for the remaining balance of your tax credit, visit the First Time Homebuyer Credit Account Look-Up to retrieve the balance of your credit.
You’ll also be able to view the amount you paid back to date, as well as the total amount of the credit you received.
In order to review your tax credit information, you’ll have to provide the following:
- Social Security number or Individual Tax ID Number (ITIN)
- Date of birth
- Street address
- ZIP code
What If I Miss a Tax Credit Repayment?
If you don’t pay your first-time home buyer tax credit, it’s essentially as serious as not paying your income tax and is handled accordingly by means of added interest or possible penalties.
Long story short: Don’t miss a payment.
Do I Need to Repay the Credit If My Home Stops Being My Primary Residence?
If your home remains your primary residence, you are required to repay the credit in equal payments over 15 years with no interest charged.
However, if you move or sell the home, it will no longer be considered your main home. You may need to repay the entire unpaid credit in one lump sum.
According to the IRS, a home is no longer considered your main home when:
- You sell your home
- You transfer the home to a spouse or former spouse in a divorce settlement
- You convert the entire home to a rental or business property
- You converted the home to a vacation or second home
- You no longer live in the home for the greater number of nights in a year
- Your home is destroyed or condemned
- You lose your home in foreclosure
- You die
If the home is no longer your main home, you must repay the entire remaining part of the credit on your next tax return. The only exception is if your home is destroyed or condemned and you buy a replacement home within two years; then, you can continue to repay the credit in annual installments.
How Can I Get Out of Repaying the 2008 Credit?
Unfortunately, there aren’t a lot of options for getting out of it. Here are the only listed exceptions to not having to pay the credit back in full:
- You get a divorce and your ex-spouse gets the house. You don’t have to pay it back, but your ex-spouse does.
- If you or your spouse is in the military and your house was sold due to service-related relocation, you don’t have to repay the credit.
- If you lose your home in a foreclosure sale, you repay the credit only up to the amount of the gain.
- If you die. However, if you claimed the credit on a joint return, your surviving spouse pays only his or her half of the remaining credit repayment amount.
As you can see, there’s not much you can do to get out of repaying the tax credit. The best thing you can do is just make sure you’re making the payments every tax season until the full amount is repaid.
Is It Possible to Repay Only a Portion of the Tax Credit?
While it’s harder to get out of paying back the tax credit altogether, there is a way that you might only have to repay a portion. Let’s dig in.
If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain on the sale.
Let’s say the purchase price of the house was $200,000. You subtract the amount of the tax credit (let’s say $7,500), to get your net cost of $192,500. Any money gained from the sale of the house (difference between the sale price and your net cost) is what you’ll be responsible for paying back.
So, if you sold your house for $195,000, you’d be responsible for paying back $2,500 total ($195,000 minus $192,500). That’s a little better than the full $7,500.
How Do I Claim the Credit on Tax Returns?
In order to claim this tax credit on your tax returns, you must:
- Use IRS Form 1040 to claim the credit
- Attach IRS Form 5405
- Attach documentation showing the purchase of the home between the applicable dates
- File a paper, not electronic, return
Additionally, you must attach your regular wage tax statement (W-2, W-2G or 1099-R, as applicable) and mail to the appropriate IRS office.
Do you have any questions about the tax credit? Let us know in the comments below!
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.