If you purchased a house in 2008, beware of this new change on the 2010 income tax returns. Some taxpayers who claimed the first-time home buyer tax credit will be required to pay the credit back to the government this April.
The initial $7,500 tax credit was available to homeowners who purchased their first house in 2008, but it was designed as a loan rather than a gift like the later home buyer tax credits. These taxpayers, from the start, should have been aware that the benefit received from the initial credit would need to be paid back, though I am sure most taxpayers do not know this. The credit requires that taxpayers begin repaying the benefit in two years — and that starts with 2010 tax returns. Those who claimed the credit on 2008 income tax returns need to begin repaying the credit now. Use form 5405 to calculate how much should be repaid, and this amount will be included on line 59 of form 1040.
The good news is that the IRS allows the tax credit to be paid back over a 15 year period, so there is no rush to come up with the full amount right away.
The bad news is the IRS doesn’t have complete records. For many who claimed the initial $7,500 first-time home buyer tax credit, the IRS doesn’t know whether the house was purchased in 2008 or later. I expect that many taxpayers who don’t need to repay their credit will receive a notification of the IRS falsely warning of the repayment requirement, and many who do need to repay the government will not receive a notification.
Those who qualified for the later credit with a maximum of $8,000 or the long-time homeowner credit with a maximum of $6,500 do not have to repay the government. This would require having purchased a house in 2009 or 2010. In those later years, the tax credit was not a loan, it was a gift. The IRS is identifying discrepancies in their records before sending out notices, but perfection will always be a fantasy.
If you receive a notice to repay your homebuyer tax credit but you believe your credit was one of the later credits, give the IRS a call and have your HUD-1 settlement statement ready.
Updated April 13, 2011 and originally published January 20, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.