DId you take advantage of the tax credit for homebuyers?
I recently received a call from a clients who purchased her home utilizing the government Home Buyer Tax Credit. She received $8000. Now she has found the man of her dreams.. 🙂 and she is getting married. He lives in Denver. He has a GREAT job…and she plans to move there and wanted to talk about selling her home.
But wait…there is a catch. She may be required to repay the entire amount of the tax credit if she sells the home or cease to use it as her “primary residence” within three years of the initial purchase. In most cases. the credit must be repaid when the purchaser’s income tax return is due for the year in which the home ceased to be the purchaser’s principal residence.
So…we have some talking to do…but as I was researching this issue it occurred to me that there are a number of ways that a seller might be required to repay the credit. The home is also not considered a “principal residence” if the home is destroyed, condemned, disposed of under threat of condemnation, or if it is foreclosed on by the lender.
There are a couple of additional situations to be aware of.
First, if the purchaser sells the home, repayment of the credit is limited to the amount of gain on the sale. This was put into place for those who were looking to receive the tax credit and then sell the home immediately. However, it also affects those who are looking to move for legitimate reasons… like my client. Many life circumstances are unexpected and unforeseeable at the time the purchase is made.
Second, if the home is destroyed, condemned, or disposed of under threat of condemnation the purchaser must acquire a new home within two years or the purchaser must repay the entire amount of the credit. This provision can have particularly harsh results, especially where a home is destroyed or foreclosed upon and the purchaser is forced to rent afterward.
This puts an additional layer of thought on folks considering a “strategic” foreclosure. This occurs when the owners CAN afford to stay in their home but elect to let it go to foreclosure because of their equity position. Estimates are that between 25-35% of foreclosures here in Arizona are just that…strategic. Right or wrong many folks feel that their home has become what the “big players” refer to as a toxic asset. They can not see any reason to keep paying on something where they are 50% underwater. There are a number of considerations when people make this particular decision…but if they received a tax credit they almost without exception WILL be on the hook to pay it back.
So…I am unsure what decision my client will make…but if she decides to rent or sell her property within three years of purchasing, it is my opinion that she will have a tax ramification that will not be pleasant.
Of course, I am not a tax advisor or an attorney and am not attempting to give legal advise…but rather helping direct her and others to tax and legal professionals so they are very clear on their options.
For specific repayment information, sellers should consult Internal Revenue Service Form 5405 and the form’s instructions, which are both available on the I.R.S. Website. (www.irs.gov)
If you are looking for a GREAT agent to help with your real estate needs please e-mail me at Adele@GreaterPhoenixHomes.com or give me a call (or text) at 602-504-3898 or 888-897-7821 x 114. Plus, I have a GREAT search tool on my web site that gives you the ability to search the entire MLS…just like agents do. Very COOL! Go to Metro Phoenix Homes and check it out! YOU can create and save as many searches as you would like.