Buying a house can be exciting, but it can also come with financial concerns and worry-induced insomnia. To make things a little easier, the federal government instituted the First-time Homebuyer Tax Credit. In 2008, 2009 and 2010, many brand-new homebuyers were eligible for credits that lowered their taxes or even increased their refunds. Members of the military, intelligence communities and Foreign Services had access to the credit in 2011, as well.
Initially, the credit was to be paid back over 15 years on tax returns. However, federal legislation changed aspects of this credit, so homebuyers who received the credit need to be aware of the current repayment regulations. First, the good news: Those who took the credit in 2009, 2010 or 2011 are not required to pay it back, provided the home was the taxpayer's primary residence for three years after purchase. Unfortunately, if you started the process in 2008, you're still on the hook.
So if you bought a home in 2008 and took advantage of the tax credit, you're required add 15 equal payments (or $500) to your annual income taxes until you pay it off [source: IRS]. The IRS used to send out "Notice CP03A, Repaying your First-time Homebuyer Credit," which provided you with information about your repayment schedule. However, since 2012, you must access this information via the online IRS First-time Homebuyer Look-up Tool. Here you'll find your year of purchase, original total credit, amount of required installment payment and outstanding balance.
You also need to file Form 5405, Repayment of the First-time Homebuyer Credit, with your federal tax return, and don't be surprised if you owe a bit more in taxes. After you repay the credit, the additional paperwork and payments are complete.
However, there are a few exceptions. Because the credit only applies to your principal residence, if you bought the house in 2008 and sell it to a relative during the 15 years of repayment, you must pay off the entire remaining balance of your credit [source: IRS]. If your purchase was in 2009 or 2010 and you sell to a family member within three years, you must repay the entire credit. Both of these accelerated payments are required whether you had a gain or a loss on the sale of the property [source: IRS].
If you sell the house to a non-relative, you're in luck: You only have to pay off what you've gained in the sale. You must file your payment on the tax return for the year the sale occurred.
For many purchasers, the First-time Homebuyer Tax Credit freed up some much-needed funds. However, the assistance comes with a few strings attached that aren't easily cut.