IRS issues initial first-time homebuyer tax credit guidance; highlights repayment requirement

The IRS has released guidance, in Question and Answer format, that describes the new, and temporary, first-time homebuyer tax credit, which was created as part of the Housing Assistance Tax Act of 2008. The guidance not only outlines eligibility for the credit and income phase-outs, it also reminds taxpayers that the credit must be repaid over a 15-year period. Additional IRS guidance on repaying the credit is expected before the start of the filing season.

Taxpayers will claim the credit on new Form 5405. The form and Instructions can be found on the IRS web site, www.irs.gov. The IRS will include Form 5405 and Instructions in 2008 tax forms and instructions, as well.

Amount of the credit

The first-time homebuyer credit is equal to the lesser of $7,500 or 10 percent of the purchase price of the home for single taxpayers and married couples filing jointly. For married taxpayers filing separately, the maximum credit amount is reduced to $3,750. Since Congress did not direct the IRS to develop rules for allocating the credit among unmarried couples, the guidance does not address that allocation.

Temporary nature

The IRS reminded taxpayers that the first-time homebuyer credit is only temporary. The credit applies to home purchases made after April 8, 2008 and before July 1, 2009. Taxpayer who owned a principal residence at any time during the three years prior to the date of the purchase to which the credit is intended to apply are not eligible for the credit.

Repayment

The IRS described several situations in which the credit will not have to be repaid, or repayment is accelerated. They include:

• Death. Any remaining annual installments will generally not be due if the taxpayer dies before making the final repayment.
• Change in use. If the taxpayer stops using the home as his or her principal residence, all remaining annual installments become due on the return for the year in which the change in use occurs.
• Sale. If the taxpayer sells the home, all remaining annual installments become due on the return for the year of sale.
• Transfer. If the taxpayer transfers the home to a spouse, or as part of a divorce settlement, to a former spouse, that person is responsible for making all subsequent installment payments.

(IR-2008-106)