First-time homebuyer tax credit: Get ready to pay

Friday, April 15th, 2011 By

A young couple dreamily contemplates their first new home.

“Dearest, it's time to start repaying that $7,500 first-time homebuyer tax credit.” (Photo Credit: CC BY-ND/Tiffany Sly/Tiffany Sly and the City)

Taxpayers who claimed the $7,500 first-time homebuyer tax credit two years ago need to be ready to pay come tax day 2011, reports the Philadelphia Inquirer. That’s because the first repayment on stimulus is due with the 2010 tax return on April 18.

How the first-time homebuyer credit worked

A segment of new U.S. homebuyers were eligible to claim a tax credit equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. According to the House and Economic Recovery Act of 2008, married individuals filing their taxes separately were eligible for a $3,750 credit, while unmarried homebuyers filing jointly could divide the tax credit. The credit applied to homes purchased after April 8, 2008, but before January 1, 2009.

Needless to say, this first-time homebuyer tax credit proved to be wildly popular. But calling it a “credit” was always problematic, as it was actually an interest-free loan. For the next 15 years, first-time homebuyers who claimed the tax credit will be repaying the government in equal installments each year. A $7,500 first-time homebuyer tax credit will break down to $500 per year, unless the home is sold before the total amount is paid off. At that point, the entire remaining amount comes due immediately.

More tax breaks for homebuyers

In addition to the first-time homebuyer tax credit, Congress extended two other tax credit opportunities to U.S. consumers. The first offered an $8,000 credit to first-time buyers who signed contracts between January 1, 2009 and April 30, 2010. As long as the contract had been signed by April 30, the sale could be completed by September 30, 2010, and the taxpayer could qualify for the credit. The second (for $6,500) applied to long-term homeowners who bought a new or existing home between November 7, 2009, and April 30, 2010.

Both of these additional tax credits require that homebuyers repay the entire amount – either $8,000 or $6,500 – if the home is sold within three years of the purchase date or the property becomes a secondary a secondary residence within the same time period. However, there’s a bit of an escape hatch if the property is sold within three years. If the profit on the sale (when compared with the original purchase price) is less than the amount of the tax credit, then homebuyers only need repay the amount of the profit.

IRS having trouble processing returns

Numerous glitches that affected tax refunds for married couples filing joint returns have caused frustration for the IRS, writes the Inquirer. Taxpayers who submitted Form 5405: “First-Time Homebuyer Credit and Repayment of the Credit” before February 22, 2011, forced the IRS to process their returns manually, creating slowdowns.

IRS projections indicate that about 1 million U.S. households will be repaying the $7,500 first-time homebuyer tax credit. Those taxpayers who haven’t gotten their refunds yet can check IRS.gov and click the “Where’s My Refund?” link for more information.

Sources

Housing and Economic Recovery Act of 2008

IRS.gov: First-time homebuyer credit

Philadelphia Inquirer

How Canada helps first-time home buyers

http://www.youtube.com/watch?v=lg_i8SRhMO0

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