NEW YORK (MainStreet) -- When Uncle Sam pushed the 2008 homebuyer's tax credit that offered first-time buyers rebates to the tune of $7,500, new homeowners weren't complaining. But that was then, and this is now. The 2010 tax season is an unpleasant reminder for those homeowners that they might get a $500 tax bill in April.
The good news is that there are some exceptions. The bad news is that if you don't qualify for those exceptions, the Internal Revenue Service fully expects you to pay up the amount of that tax credit you took three years ago.
Tax season comes as an unpleasant reminder for the first-time homebuyers from 2008 -- those who took advantage of government rebates -- that they might get a $500 tax bill come April 15.
Pure and simple (though nothing with the IRS is ever simple), the $7,500 homebuyer's tax credit was an interest-free loan from the federal government to new homeowners. The idea was to light a fire under the tepid U.S. housing market by getting more buyers to sign mortgage deals.
By most estimates, the homebuyer tax credit did get more people into homes -- for the short term, at least.
Payouts from the tax credit totaled approximately $23 billion, according to a study last year from FNC, an Oxford, Miss.-based real estate analytic firm. The FNC's data showed that the tax credit stabilized housing prices in "most states" and successfully reinvigorated the U.S. housing market.
"Between July 2008 and June 2010, the First Time Home Buyer's program induced an estimated 10.1% abnormal, or above-trend, growth in home prices," says Robert Dorsey, chief data and analytics officer.
"The result of this tax credit stimulus was modest home price stabilization which lasted through June," Dorsey continues. "In other words, if Congress had not approved the First Time Home Buyer's Tax Credit, home prices would be 10% lower than they are now and falling rather than stable and slowly rising."
That's all well and good, but who has to pay back the tax credit?
According to the tax preparation firm H&R Block (HRB) - Get H&R Block, Inc. Report, more than 950,000 taxpayers who claimed the 2008 tax credit have to begin repaying the $7,500 debt -- through annual $500 payments -- starting this year (on tax year 2010 returns).
Taxpayers who took the more recent homebuyer tax credits -- in 2009 and last year -- don't have to repay their loan at all unless the home is no longer their primary residence within three years of purchase.
But the 2008 Homebuyer Tax Credit recipients weren't grandfathered in under the 2009 and 2010 deals.
That's where those exemptions could help. Under IRS guidelines, you don't have to pay back the money you got from the credit if you meet one of the following conditions:
- You sold the home without earning a gain on the property from a "nonrelated" party (as in a foreclosure).
- You (or your spouse) transferred your home as part of a divorce settlement, so only the former spouse who kept the home is responsible for making the rest of the tax credit repayments.
- Your home was destroyed, condemned or disposed under threat of condemnation and you bought a replacement home within two years. In this case, you'll continue to repay the credit in installments each year.
- If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain, if any, on the sale.
- If a spouse dies after claiming the credit on a joint return in 2008, the obligation becomes only 50%, or $250 per year for 15 years, for the surviving spouse.
If the above doesn't apply, get ready to pay back the loan from Uncle Sam.
Depending on the amount of your credit, you may not have to pay back the entire amount. The IRS notes that the amount repaid each year is one-fifteenth, or 6.66%, of the credit for each taxable year in the 15-year recapture period, which begins with the second taxable year after the year of purchase.
"To find out how much you need to repay each year, take the amount of your credit and divide it by 15," notes the IRS. "For example, if you received the maximum credit of $7,500, divide $7,500 by 15, which equals $500, and add the $500 to your income tax each year for 15 years. If you received a credit of $6,000, divide $6,000 by 15, which equals $400, and add the $400 to your income tax each year for 15 years."
To repay the tax credit, use IRS Form 5405.
If you took the loan and don't qualify for a pass from the government, it's time to pay the piper -- this year and, quite possibly, for many more after that.
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