FTHBC Repayment Rules When Selling Your Home at a Loss
Understand how selling your home at a loss impacts your First-Time Home Buyers' Credit repayment and what it means for your tax obligations.
The First-Time Homebuyer Credit (FTHBC) provided financial assistance to qualifying buyers but came with repayment obligations. If you received this credit and are now selling your home at a loss, understanding how this affects your repayment is essential.
Selling for less than the purchase price can impact what you owe, potentially reducing or eliminating the required repayment. However, specific rules determine whether you still have an obligation.
Eligibility Requirements
Qualifying for the First-Time Homebuyer Credit depended on income limits, purchase date, and property use. The credit was available to individuals who had not owned a principal residence in the three years before purchasing a home. If one spouse had owned a home within that period, a married couple would not qualify.
Income restrictions applied, with the credit phasing out for taxpayers with a modified adjusted gross income (MAGI) above $75,000 for single filers and $150,000 for joint filers. Those exceeding $95,000 (single) or $170,000 (joint) were ineligible.
The timing of the purchase determined repayment obligations. The original credit, introduced under the Housing and Economic Recovery Act of 2008, functioned as an interest-free loan requiring repayment over 15 years. Later versions, enacted through the American Recovery and Reinvestment Act of 2009 and subsequent legislation, removed the repayment requirement for homes purchased after 2008 unless the property was sold or ceased to be the primary residence within three years.
Repayment Obligations
For those who received the credit under the 2008 program, repayment occurs in equal annual installments over 15 years. Each year, 1/15th of the credit amount is added to the taxpayer’s return as additional tax liability. A homebuyer who received the full $7,500 credit, for example, owes $500 per year.
If the home is sold before full repayment, the remaining balance is typically due in the year of sale. However, if the home is sold at a loss, repayment may be reduced or eliminated. The IRS calculates the obligation based on the sale price and adjusted basis, ensuring homeowners do not repay more than their net proceeds allow.
Some situations exempt homeowners from repayment. If the homeowner passes away, the remaining balance is forgiven. In divorce cases, responsibility for repayment may transfer to the spouse who retains ownership. If the home is destroyed due to a natural disaster and not replaced, repayment may also be waived.
Selling the Property at a Loss
Homeowners who sell their property for less than they originally paid may not have to repay the full amount of the credit. The IRS does not require repayment beyond what a homeowner can recover from the sale. If the selling price does not exceed the adjusted basis, the remaining balance of the credit may be reduced or eliminated.
The adjusted basis includes the original purchase price plus capital improvements such as renovations, structural additions, and energy-efficient upgrades. Routine maintenance and repairs do not increase the adjusted basis. A new roof or remodeled kitchen, for example, would be factored into the calculation, potentially increasing the basis and reducing repayment obligations.
A short sale, where the lender accepts less than the remaining mortgage balance, may also impact repayment. The IRS assesses whether any proceeds remain after satisfying the mortgage and selling costs. If there is no net gain, repayment may be forgiven, but homeowners should carefully review their financial details to ensure compliance.
Calculating Any Remaining Balance
To determine repayment, the IRS calculates the lesser of the outstanding credit balance or the gain realized on the sale. If the sale results in no gain or a loss, repayment is typically waived.
Selling expenses such as real estate agent commissions, legal fees, and title transfer costs reduce the taxable gain, potentially lowering the repayment amount. If the adjusted sales proceeds result in a gain, the homeowner must repay the credit balance up to that gain amount.
If the home was used for both personal and business purposes, such as a home office or rental unit, the calculation becomes more complex. The portion of the home used for business may require a separate basis and gain calculation under IRS rules. Depreciation claimed on the business portion could also be subject to recapture.
Adjusting Tax Filings
Selling a home purchased with the First-Time Homebuyer Credit requires adjustments to tax filings. The IRS requires taxpayers to report the sale in the year it occurs using Form 5405 to calculate repayment or document an exemption.
If repayment is required, the amount is included as an additional tax liability on Form 1040. Taxpayers should retain closing statements, selling expenses, and adjusted basis calculations in case of an IRS review. If no repayment is required, Form 5405 must still be filed to formally document the exemption.
If the home was used for rental or business purposes, depreciation recapture rules may apply, requiring further adjustments to taxable income.
Penalties for Noncompliance
Failing to report the sale or repay the required balance can result in penalties and interest charges. The IRS treats unpaid amounts as a tax deficiency, which may lead to additional assessments, liens, or garnishments. Taxpayers who fail to include the repayment amount on their return may receive a notice of underpayment.
If a taxpayer incorrectly claims an exemption from repayment, the IRS may disallow the waiver and impose additional tax liabilities. Interest accrues on unpaid amounts from the original due date of the return. In cases of willful noncompliance, the IRS can pursue enforcement actions, including levies on wages or bank accounts. Ensuring accurate reporting and timely repayment helps avoid these consequences.