Indianapolis CPA Explains The Foreclosure Exception To First-Time Homebuyer Credit Repayment

If you received a first-time homebuyer credit when you initially purchased your main residence, you have to repay the credit overtime.
The IRS sends a notice to you each year with the relative information.  This document – Notice CP03A – lists the amount of the credit you received and the amount you have to pay as additional tax.  This amount should be included with your tax return for the year – using Form 5405 – which could result in an additional tax owed or a reduced refund.

The IRS will check many sources of information each year to verify whether you do still own the home.  Then your tax records will be reviewed to see if you have reported the change in residence.  So when you do change your residence, this must also be reported on Form 5405.

A change in your main residence includes all of the following:

  • You sold your main home to a related person or entity
  • You converted the entire home to a rental or business property.
  • You converted the home to a vacation or second home
  • You no longer live in the home for the greater number of nights in a year

In most cases, full payment of the credit is due.  However, there are exceptions to this rule in certain circumstances.  Those circumstances are as follows:

  • You sold your main home to an unrelated person or entity
  • Your home was involved in a foreclosure

If your home was sold to an unrelated entity, you only owe the credit up to the amount of the capital gain.  And if you’ve lost your home in foreclosure, you must only pay up to the amount of the gain as well.

If you have any questions or need further assistance with any of these matters, give Marietta CPAs a call at 317-216-1040.

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