If you took advantage of the first-time home buyer tax credit in 2008, the IRS may have a surprise for you this tax season: Starting this year, nearly half of the taxpayers who claimed the credit will have to give the money back.
If you took advantage of the first-time home buyer tax credit in 2008, Uncle Sam may have a surprise for you this tax season. The Inspector General for Tax Administration announced that about 950,000 -- or nearly half -- of the roughly 1.8 million taxpayers who claimed the credit will have to give the money back.
Why? It’s in the fine print. Under the Housing and Economic Recovery Act of 2008, home buyers who purchased their properties after April 8, 2008, and before Jan. 1, 2009, were eligible to deduct up to 10 percent -- or $7,500, whichever is less -- of the home’s purchase price. But the credit wasn’t a giveaway: The stimulus was meant to act as a no-interest loan, which homebuyers are responsible for paying back over the next 15 years.
The Internal Revenue Service says that eligible taxpayers who bought homes within the specified time period and claimed the maximum available credit of $7,500 on their 2008 federal income-tax returns must begin repaying the credit by including one-fifteenth of the total, or $500, as an additional tax on their 2010 returns. That $500 payment would be required to be made, each year thereafter, until 2024.
If taxpayers had waited until 2009 to buy their homes, they would have had a true tax credit: Lawmakers extended the credit and made the credit a refund rather than a loan.
According to the IRS, there are some exceptions:
• If the home buyer dies, the remaining annual installments are waived, though a surviving spouse would be required to repay his or her half of the remaining payment due.
• If the home buyer stops using the house as a main residence, the remaining balance owed becomes due immediately in the year the home stops using it.
• If the home buyer sells the home, the remaining balance becomes due on the tax return for the year of the sale. The repayment is limited to the amount of the gain on the sale, if the house is sold to an unrelated homebuyer. If there’s no gain, or even a loss, the payments may be reduced or waived entirely.
• If a home buyer transfers the home to a spouse, or to a former spouse under a divorce agreement, the spouse who receives the home is responsible for making the remaining installment payments.
What should you do? If you purchased your home during the April through December 2008 period and took the tax credit, adjust your withholding or start making quarterly estimated tax payments to cover the yearly $500 payment. If you think you may qualify as one of the exceptions to the rule, or if you’re not sure which tax-credit program your home purchase falls under, ask a tax professional for advice.