Real Estate Blog

And the fine print says? It’s time to repay the piper. The 2008 first-time home buyer tax credit was a loan, not a gift.

If you bought your first home after April 8, 2008, and before Jan. 1, 2009, and met requirements for adjusted gross income, you were eligible for a tax credit of up to $7,500 from the first-time home buyer tax credit program. But unlike buyers who used similar programs in 2009 and 2010, you have to repay the credit starting with your 2010 tax filing.

Even more, the IRS says you can’t trade in your loan for the later gift program; all you can do is pony up.

What are the first-time home buyer tax credit repayment terms?

You owe the government 1/15th of the credit each year over the next 15 years. If you took the $7,500 maximum, that’s $500 a year. Early payback is allowable. But why give it to the feds?

Tip: If you’re tempted to pay it all back and be done with it, don’t. Because the loan is interest-free, you’re better off investing spare cash in a CD or other interest-bearing account.

How do I repay it?

You file it as part of your federal incomes taxes—every year until you’re done. Use Form 5405 and download the corresponding instructions.

Are there any exceptions?

Just a few “ifs,” and they cut both ways:

• If you die during the repayment period, your co-owner spouse pays just half for the remaining years. If you’re single, your estate owes nothing.

• If your home stops being your primary residence, you have to pay it all back with that year’s return.

• If you sell your home, you have to pay it all back with that year’s return. However, if there’s no gain or a loss, part or all of the repayments may be canceled. See instructions for the exact calculation.

• If you transfer the house to a spouse, you transfer the payment obligation as well. Lose the house in a divorce? You get the satisfaction of sticking your ex with the repayments as well.

What if I forget to repay the first-time home buyer tax credit?

It’s like “forgetting” to pay your income tax. Missed payments can lead to penalties, interest, and eventually, a visit from a modern-day Eliot Ness.

The IRS will remind you to pay it each year with Notice CP03A, which documents how much you still owe.

This article provides general information about tax laws and consequences, but shouldn’t be relied on for tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice. Remember tax laws may vary by jurisdiction.