We have had several clients ask about how a short sale or foreclosure affects their responsibilities to pay back the Home Buyer Tax Credit recently.
Under the general rules an individual that claimed the 2008 Home Buyer Credit is required to pay back the entire amount of the credit, up to $7,500 if the home stops being their principal residence or “main home” no matter when an event occurs that causes the home to stop qualifying as their principal residence. Individuals that claimed the 2009-2010 Credit are only required to pay the credit back if the home stops being their principal residence within three years of purchasing the house. These are the rules that concern most people and stop them from taking any action. The good news is there are exceptions to the general repayment rules and one of those exceptions is selling the house in a short sale or losing it in a foreclosure.
In a short sale situation the general answer is usually the same, no matter which credit was claimed, the 2008 credit or the 2009-2010 credit, there likely will be no requirement to pay the credit back because the property is sold for a loss.* Under the applicable tax laws, a home owner that bought a home in 2008-2010 and claimed the first time home buyer credit does not have to pay the credit back if there is no gain on the sale. To calculate gain on sale, a homeowner must subtract the credit from the purchase price, and then subtract that from the sale price.
HOW IT WORKS
If a homeowner short sales a home in 2012 for $200,000, and you purchased the home for 250,000 in 2008, you have a loss of $42,500 ($250,000-$7,500=$242,500; $200,000-$242,500= -$42,500). That does not mean you can enter the loss on your tax return, but it does me and that you are not required to pay the tax credit back. If instead you were able to sell your house for $245,000, you must repay a gain of $2,500 ($250,000-$7,500=$242,500; $245,000-$242,500=$2,500). That’s because the $245,000 sale price exceeds the basis you have in the home of $242,500 cost basis ($250,000 actual cost minus the $7,500 credit).
While we have described general rules above, it is always important to discuss individual application to your specific situation. Blogs describing general rules are good for informational purposes, but they do not take the place of professional advice from an attorney or CPA.
To sit down with an experienced real estate attorney at the Wells Law Group, call (480) 428-3290 today. We offer a free or reduced cost consultations to homeowners seeking answers concerning their distressed real estate depending on your situation.
*There are specific exceptions that could change the outcome, for instance, if the house is not sold in an arm’s length transaction.