Many homeowners who purchased a home in Colorado Springs between 2009 and 2010 benefited from the most recent tax credit of $8,000 ($6,500 for long-time residents) and those who were active duty in the military, had a one year extension (April 30, 2011). A lot can change in a couple of years and many homeowners have questions about repayment of the tax credit if they sell their home prior to the 36-month requirement.
To benefit from the tax credit, first time home buyers must live in the home as their principal residence for at least three years. If the homeowner does not occupy the property as a principal residence for at least three years, then the credit may have to be repaid to the IRS. Note: First time home buyers who are serving actively in the military and are required to relocate are exempt from this requirement.
Examples of situations when the property is no longer your primary residence may include selling or foreclosing on the home, conveying the property to a spouse as a result of divorce, or converting the home to a rental property or second home.
In the situation of a divorce, if the property is transferred to a spouse in the divorce decree, the tax credit should not have to be repaid unless the property discontinues being the primary residence of the spouse whom the house was transferred to within that 3-year time frame. In the event the home does stop being a primary residence, the tax credit would have to be repaid by the spouse whom the house was transferred to.
If a homeowner does proceed to sell their home prior to the 36-month window, the amount of the tax credit required to be repaid will depend on whether or not the homeowner receives any net proceeds as a result of the sale. If there is a gain, the repayment amount is figured on the amount of the gain. For example, if the homeowner sells the home to someone who is not related to him or her and gains $5,000 from the sale, the home owner should only have to repay $5,000 of the $8,000 tax credit. If the homeowner does not have a gain from the sale, the homeowner should not have to repay the credit.
The calculations can be figured on IRS Form 5405. Keep in mind that the basis of the property is reduced by the amount of the credit on the form to account for the tax credit received by the homeowner. How is the credit repayed? It is reflected as an additional tax on the return for the year the home stopped being your primary residence.
Homeowners who received the $7,500 first time home buyer tax credit and sell their home, may have to pay the remaining annual installments depending on whether there is a gain or loss as a result of the sale. For more information and answers to questions about the $7,500 tax credit for homes purchased in 2008, please view the publication on IRS.gov
For more information and answers to questions about the most recent 2009 or 2010 tax credit please go to the IRS website.
It can be complicated and every homeowner’s situation is different so it is best to consult with the IRS directly at 1-800-829-1040 or their website, www.IRS.gov for more information.
Contact Patricia Beck at 719-660-9058 if you would like assistance in selling your home in Colorado Springs