Friday, May 8, 2009

MORE ON THE FIRST TIME HOME BUYER'S CREDIT

Yesterday’s post discussed the “new and improved” First Time Homebuyers Credit.

I had several clients this past tax filing season who claimed the original credit – a married couple, a single taxpayer and two unrelated individuals who jointly purchased a residence. I did not have any clients who purchased in 2009 and claimed the credit on a 2008 return.

Below is a copy of the memo I included in the folder that I sent to these clients with their finished returns:

Dear Tax Client-

You claimed the “original” First-Time Homebuyer’s Tax Credit on your 2008 federal income tax return.

This is not a true tax credit – but in reality an interest-free loan from Uncle Sam. Because you purchased your home in 2008 you must repay the amount of the credit allowed.

The repayment will be made as an adjustment to your federal income tax return evenly over a 15 year period beginning with the filing of your 2010 Form 1040.

If you claimed the full credit you must increase your tax liability by $500 each year beginning with 2010. If you were not allowed the full credit the adjustment is less. For example, if your credit was $5000 your annual adjustment is $333.

If you stop using the home as your personal residence, i.e. the property is converted to a vacation home or rental property, all remaining annual installments become due on the return for the year that the use is changed.

If you sell your home before repaying the credit all remaining annual installments become due on the return for the year of sale. However, the repayment is limited to the amount of gain on the sale.

Let me know if you have any questions.

RDF
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Those of you out there who claimed the credit on a 2008 home purchase – did your tax preparer, or tax software, provide you with a similar memo or explanation? Do you have any questions?

TTFN

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