Relocation and the First-Time Homebuyer Credit

With over 1.8 million people claiming the home buyer tax credit in 2009 alone, there is a good chance that one of your candidates was among the recipients. Most new homeowners know that if they claimed the credit on their 2008 taxes they will need to pay that credit back over a span of 15 years. What some may not realize is if they claimed the credit on their 2009 or 2010 taxes, and they relocate, they may also have to pay that money back.

To understand why let's first look at the history of the first-time homebuyer tax credit:

• The Housing and Economic Recovery Act of 2008 allowed first-time homebuyers who purchased a primary residence between April 9, 2008 and December 31, 2008 to file for a tax credit up $7,500. This credit was similar to a no-interest loan that must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.
   
• The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 which did not have to be repaid for purchases made in 2009 before December 1st. The Worker, Homeownership and Business Assistance Act of 2009 extended the deadline making taxpayers who had a binding contract to purchase a home before May 1, 2010, eligible for the credit. Buyers must have closed on the home before July 1, 2010.
   
• This Act also granted a credit of up to $6,500 to current homeowners that purchased a primary residence between November 9, 2009 and September 30, 2010. To qualify, purchasers must have lived in their principal residence for at least five consecutive years in the eight years prior to the new purchase.

• The Homebuyer Assistance and Improvement Act of 2010, enacted on July 2, 2010, extended the closing deadlines set in the American Recovery and Reinvestment Act of 2009 to September 30, 2010.

So why would anyone who purchased between 2009 and 2010 need to repay the credit? The keywords listed above are primary residence. The Act stipulated that the individual must keep the home as their primary residence for no less than 36 months after the purchase date. According to the IRS’ guidelines, a home ceases to be considered a primary residence when:

• The home is sold. This includes if it is sold due to relocation, unless the relocation is for the military.
   
• The home is transferred to a spouse or former spouse in a divorce settlement.
   
• The entire home is converted to a rental or business property.
   
• The home is converted to a vacation or second home.
• The home is not lived in for the greater number of nights in a year.
   
• The home is destroyed or condemned.
   
• The home is lost in a foreclosure.

If the individual falls under one of these scenarios they will have to repay the credit in either full or part. Partial repayments may occur in the following situations:

• If the primary residence is sold to a non-related person or entity the individual must repay the amount of the credit up to the amount of their capital gain. (Note: when calculating gain or loss on the home if the individual received the first-time homebuyer credit, they reduce their basis by the amount of the credit. See the IRS’ Publication 551, Basis of Assets, for more information.)
   
• If the home was lost in a foreclosure the individual must repay the credit only up to the amount of gain.

Note: In a loss on sale situation the credit does not need to be repaid.

For more information on the guidelines of the credit and repayment view the IRS’ First-Time Homebuyer Credit Questions and Answers: Homes Purchased in 2009 or 2010 here. Always consult your tax advisor for individual circumstances.