In 2008, people were thrilled with the opportunity to purchase a home and get a First Time Home Buyer Tax Credit of up to $7,500. In 2009 and 2010, that figure was raised to $8,000, and it was a great stimulus to the lagging housing market. April of 2010, the last month of the available First Time Home Buyer Tax Credit, saw a spike in home sales that encouraged and breathed life into a defeated market. The following month (May 2010) saw a crash of 33% in that same housing market, with the steepest decline in home sales since they began keeping records in 1963.
But the First Time Home Buyer Tax Credit offered in 2008 was a completely different program than the one offered in 2009 and 2010. This was definitely an instance where it didn’t pay to be early.
So now it is 2011, and it is time for most of us to start thinking of paying taxes for last year. If you were part of the group that purchased a home and received the First Time Home Buyer Tax Credit in 2008, the very unfortunate news is that now, with the filing of this year’s tax return, Uncle Sam wants you to start paying him back. I am not an accountant, and you should check with yours for the details, but according to what I understand, you have fifteen (15) years to repay this credit.
So each year, you will add $500 to your tax liability until the full amount is paid off. The IRS looked at this First Time Home Buyer Tax Credit of 2008 as an “interest free loan.” If you sell your home before the fifteen years is up, you would owe the IRS the unpaid balance. In other words, if you sold at the end of eight years after 2010, then you would owe the Feds $3,500 from the proceeds of your home sale.
On the other hand, if you purchased a home in 2009 or 2010 and took the First Time Home Buyer Tax Credit of up to $8,000, you don’t EVER have to pay it back, with ONE EXCEPTION – you must live in the home on which you used the Tax Credit for three (3) years. If you move out prior to the three year regulation, please check with your tax preparer or financial planner to find out what your tax obligation will be.
And please make sure that you DO pay what is owed. The IRS will add penalties and interest if your liability is not paid in a timely manner.