IRS Form 5405 First Time Home Buyer Credit

The IRS has issued form 5405, which you will need to fill out if you’re going to take the $8,000 first time home buyer tax credit. But Form 5405’s instructions include information on who can take the credit, how much can be taken and under what circumstances the credit must be repaid. This FAQ will help you sort out the details so you don’t run afoul of IRS rules.

Can I Take the First Time Home Buyer Tax Credit?

You qualify for the tax credit if you bought your main home (defined as a house, condo, co-op, house boat, house trailer, or other form of dwelling) on or after April 8, 2008 through December 31, 2008 and before December 1, 2009. You must be a first-time buyer or have not owned a home during the past three years.

If you bought your first home in 2008, you qualify for a $7,500 tax credit, which is actually more like an interest free loan. It must be repaid in $500 installments over 15 years.

If you bought your first home in 2009, you qualify for up to an $8,000 tax credit, which does not need to be repaid, except in certain circumstances (see below).

Either way, the tax credit is structured as the lesser of 10 percent of the purchase price of the home or $7,500/$8,000 (depending on the date).

You are allowed the full amount of the credit if your modified adjusted gross income (MAGI) is $75,000 or less ($150,000 or less if married filing jointly). The phase-out of the credit begins when your MAGI exceeds $75,000 ($150,000 if married filing jointly). The credit is eliminated completely when your MAGI reaches $95,000 ($170,000 if married filing jointly).

I Owned a House and My Wife Wasn’t On Title or The Mortgage. Will She Qualify as a First Time Buyer?

IRS law defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase. If you’re married, the law requires neither you nor your spouse to have been homeowenrs for the prior three years. However, if you’re unmarried partners, and one of the partners qualifies as a first-time home buyer, that person may receive up to a $4,000 tax credit.

I Own a Vacation Home. Am I Still A First-Time Buyer?

Ownership of a vacation home or a rental property does not disqualify you as a first-time buyer in the eyes of the program. You must have owned a principal residence.

What Are The Residency Requirements For the Tax Credit?

You must live in the property as your primary residence or “main” property. The IRS defines “main property” as a house, houseboat, housetrailer, cooperative apartment, condominium, or other type of residence. If you are building or buying new construction, the date of occupancy is the date which you can count for the tax credit. For most home buyers, this will be the date you close on the house and move in, not the date you close on the construction loan or sign the contract.

You must live in the property as your primary residence or risk having to repay some or all of the tax credit.

Who Cannot Claim The ,000 Tax Credit?

According to the IRS, you cannot claim the $8,000 tax credit if:

  1. Your modified adjusted gross income is $95,000 or more ($170,000 or more if married filing jointly).
  2. You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any tax year. This rule does not apply for a home purchased in 2009.
  3. Your home financing comes from tax-exempt mortgage revenue bonds. This rule does not apply for a home purchased in 2009.
  4. You are a nonresident alien.
  5. Your home is located outside of the U.S.
  6. You sold the home, or it ceased to be your main home, before the end of 2008.
  7. You acquired your home by gift or inheritance.
  8. You acquired your home from a related person, including your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.); A corporation in which you directly or indirectly own more than 50 percent in value of the outstanding stock of the corporation; A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.

Do I Have to Repay The ,000 Tax Credit?

Homes purchased in 2008. You generally must repay the credit over a 15-year period in 15 equal installments. The repayment period begins in 2010 and you must include the first installment as additional tax on your 2010 tax return.

If your home ceases to be your main home before the 15-year period is up, you must include all remaining annual installments as additional tax on the return for the tax year that happens. This includes situations where you sell the home, you convert it to business or rental property, or the home is destroyed, condemned, or disposed of under threat of condemnation. If you and your spouse claim the credit on a joint return, each spouse is treated as having been allowed half of the credit for purposes of repaying the credit.

Example 1. You claimed a $7,500 credit on your 2008 tax return. You must include $500 ($7,500 4 15) as additional tax on your 2010 tax return and on each tax return for the next 14 years.
Example 2. You claimed a $7,500 credit on your 2008 tax return. In 2009, you sold the home to your son. You must include $7,500 as additional tax on your 2009 tax return.

Exceptions. The following are exceptions to the repayment rule.

  1. If you sell the home to someone who is not related to you, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of the credit you did not repay.

  2. If the home is destroyed, condemned, or disposed of under threat of condemnation, and you acquire a new main home within 2 years of the event, you continue to pay the installments over the remainder of the 15-year repayment period.

  3. If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for making all subsequent installment payments.

  4. If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.

Homes purchased in 2009. You must repay the credit only if the home ceases to be your main home within the 36-month period beginning on the purchase date. This includes situations where you sell the home, you convert it to business or rental property, or the home is destroyed, condemned, or disposed of under threat of condemnation. You repay the credit by including it as
additional tax on the return for the year the home ceases to be your main home. If the home continues to be your main home for at least 36 months beginning on the purchase date, you do not have to repay any of the credit.

If you and your spouse claim the credit on a joint return, each spouse is treated as having been allowed half of the credit for purposes of repaying the credit.

Exceptions. The following are exceptions to the repayment rule.

  1. If you sell the home to someone who is not related to you, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted
    basis of the home by the amount of the credit.

  2. If the home is destroyed, condemned, or disposed of under threat of condemnation, and you acquire a new main home within 2 years of the event, you do not have to repay the credit.

  3. If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit.

  4. If you die, repayment of the credit is not required. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the credit.

For more details, see IRS Form 5405

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