Repayment of 2008 first time home buyer tax credit

[Callum K.]

In 2008 I purchased my first home and qualified for the $7500 tax credit loan that requires a repayment over the next 15 years. I made the $500 payment in 2010 and 2011 but in 2012 I converted my home to a rental property and rented it out in December.

I believe that if you vacate your main home prior to the 15 year repayment schedule then the loan is due at the end of the tax year. I checked the IRS website and I am pretty sure I have my answer but I was curious if anyone knew for sure.

[Steven Hamilton II]

Callum K.,

I did not see that you had the 2008 version. I will clarify because there are 3 different versions. Whether it becomes taxable will depend upon why or how the house was converted to a rental property.

[b]It will be payable on your 2012 tax return unless an exception applies. So I have to ask "Why did you move" as there are other exceptions that could apply such as a work transfer to somewhere else causing you to have to involuntarily convert it.

Here is an excerpt from my tax research service:
Purchases after April 8, 2008 and before January 1, 2009
Taxpayers who purchased a principal residence after April 8, 2008, and before January 1, 2009, and who have not owned a principal residence in the three years prior to the date of purchase, may claim a refundable credit equal to the lesser of 10% of the purchase price or $7,500 ($3,750 if married filing separately).

If two or more unmarried individuals purchase the principal residence, they may qualify for up to a total credit of $7,500. IRS allows the credit to be allocated among such taxpayers using any reasonable method, provided no portion is allocated to an ineligible taxpayer. See "Who is eligible to receive the first-time homebuyer credit?" for more information.

Eligible taxpayers may claim the credit on their 2008 tax returns by filing Form 5405, First-Time Homebuyer Credit, and entering the credit amount on Form 1040 line 69. Eligibility for the credit phases out for taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 if married filing joint) in the year of purchase.

Regular Repayment Rule
The first-time homebuyer credit is unique among tax credits in that it must be repaid in 15 equal installments (without interest) starting in 2010. The repayment amount for each year is an additional income tax equaling 1/15 of the total credit. The taxpayer is required to pay back the installment repayments starting on the tax return for 2010 and continuing for each subsequent year for a total of 15 years. Since no interest is charged, the credit is the equivalent of an interest free loan.

Note: Taxpayers repaying the 2008 credit under the regular repayment rule do not need to file Form 5405 to report the repayment. Instead the repayment is reported directly on line 59b of Form 1040.

Accelerated Repayment Rule
Repayment of the credit is accelerated when the taxpayer sells the home or otherwise no longer uses it as his principal residence. The unpaid balance of the credit must be repaid in the year when this occurs. These repayments would be reported on Form 5405.

Example: A taxpayer purchased a home in 2008 and received a $7,500 credit on his 2008 tax return, and sells the home in 2012. Starting in 2010, the taxpayer pays an additional tax of $500 ($7,500 x 1/15) each year in 2010 and 2011. Because the taxpayer sells the home in 2012, the taxpayer must pay an additional tax of the entire $6,500 for 2012.

Repayment Exceptions

Taxpayers are only required to repay the credit to the extent of the gain on the sale to an unrelated party. When determining the amount of gain on the sale, the basis in the home must be reduced by the amount of the credit that the taxpayer originally received before determining the amount of gain on the sale. If there is no gain on the sale after the basis reduction, the taxpayer does not have to repay any of the unrepaid balance provided they sold the home to an unrelated party.
Note: If a taxpayer sells to a related party they will have to repay the entire credit amount received (minus repayments if received the $7,500 version of the credit).
Note: The repayment rule applies before excluding any gain under IRC § 121. This means the taxpayer will repay the credit to the extent of gain on the sale, regardless of whether that gain can be excluded under the principal residence provision.

Death of the taxpayer will not trigger recapture (regular or accelerated). However, if the deceased taxpayer's spouse is a qualifying first-time homebuyer who filed a joint return with the now deceased taxpayer, he or she must continue repaying one-half of the credit.
A taxpayer's divorce will not trigger the accelerated recapture rules. Rather, the spouse who receives the principal residence in the divorce is responsible for the remaining payments and any accelerated repayments that occur in the future. If the home is sold as a result of the divorce then the credit will have to repaid under the regular recapture rule because the home has ceased to be the principal residence of either spouse.
If a residence is forcibly or involuntarily converted and the taxpayer purchases a new principal residence within two years from the date of disposition, the taxpayer will continue to make the standard installment payments on the new residence as if it were the original principal residence.
Special Repayment Exceptions for Members of the Armed Forces
Members of the uniformed services, Foreign Service of the United States, and the intelligence community who dispose of their residence after December 31, 2008 due to Government orders for qualified official extended duty service will not have to repay the credit if disposition is in connection with the government orders. This exception to repayment applies to the year of disposition and all subsequent tax years.

Eligibility
A taxpayer may not claim the credit if any of the following apply:

The taxpayer's modified AGI is $95,000 or more ($170,000 or more if married filing jointly)
The taxpayer is eligible for the District of Columbia first-time home-buyer credit for 2008 or any prior year (Form 8859)
The home financing comes from tax-exempt mortgage revenue bonds
The taxpayer is a nonresident alien
The home is located outside of the United States
The home is sold, or ceases to be the taxpayer's main residence, in the year of purchase
The home was acquired by gift or inheritance
The home was acquired from a related person

-Steven