First-time Homebuyer Credit
The first-time homebuyer credit, provided in Code § 36, was in effect for tax years 2008-2010, with an extension for certain members of the military, foreign service, and intelligence communities until 2011. § 36(h)(3). The credit reduced the Federal income tax liability for qualified individuals who purchased a principal residence from April 2008 through October 2010. The credit had many limitations, but generally it provided the homebuyers with up to $8,000, based on a percentage of the purchase price of the home. § 36(b).
The credit’s name is misleading. A first-time homebuyer is defined as an individual who did not have an ownership interest in a principal residence for the three years preceding the purchase of a home. § 36(c)(1). The credit was extended to include homebuyers who had owned a principal residence for five of the previous eight years. § 36(c)(6).
Depending on the purchase date, the credit served as either an interest-free loan or an outright grant. For individuals taking the credit on a purchase before January 1, 2009, the amount of the credit must be repaid in equal annual installments over a 15 year recapture period beginning in the second tax year following purchase (approximately $500 per year for those who received the maximum credit for those years, $7,500). § 36(f)(1). Because the recapture appears on the taxpayer’s income tax return, during the recapture period the taxpayer must file a return even if their income is less than the filing requirement. § 36(e).
If the home is sold before the recapture period ends, the recapture is accelerated, except on the death of the taxpayer, an involuntary conversion, a transfer between spouses, or a transfer incident to divorce. § 36(f)(2) and (4). The amount of accelerated recapture is limited by the amount of gain on the sale. § 36(f)(3)
If the credit was taken on a purchase after January 1, 2009, recapture is waived and accelerated recapture, subject to the exceptions described above, can only be triggered in the first 36 months of ownership. § 36(f)(4)(D).