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Do You Have To Repay Your Homebuyers Tax Credit?

    * First version, 2008: The original credit was for as much as $7,500 for individuals who bought a principal residence in the U.S. between April 9 and Dec. 31, 2008, and who had not owned one for three years prior to the purchase date.
    * Second version, 2009 and 2010: Congress increased the credit to as much as $8,000 for individuals who bought a principal residence between Jan. 1, 2009, and April 30, 2010, and who had not owned one within three years of the purchase date. The closing deadline was extended to June 30 for homes that were under contract as of April 30. The deadline was extended again to Sept. 30 for homes that were under contract as of April 30 and did not close by June 30 as planned.
    * Third version, 2009 and 2010: This credit offered as much as $6,500 to homeowners who had owned a principal residence in the U.S. for at least five consecutive years in the eight years before the purchase of a new principal residence. The purchase date had to be between Nov. 7, 2009, and April 30, 2010. The closing deadline was extended to the same dates as the second version.

Repayment rules for first version
Buyers who claimed the 2008 version of the credit generally must repay the credit in equal installments in the next 15 years, starting with their 2010 tax return.

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Example: Say you claimed a $7,500 credit for a $200,000 purchase in 2008. You generally must add $500, one-fifteenth of $7,500, to the tax bill shown on your 2010 Form 1040. If you continue to own the home, you'll do the same thing for the next 14 years. If you sell this year, however, you'll have to repay the $7,500 credit or your "gain on sale," whichever is smaller.
What's your home worth?

To calculate your gain on sale, subtract the credit from the purchase price, and then subtract that from your 2010 sale price. In this example, if you sold the home in 2010 for $195,000, you must repay the $2,500 gain. That's because the $195,000 sale price exceeds your home's $192,500 cost basis ($200,000 actual cost minus the $7,500 credit).

If you have a loss on the sale after subtracting the credit from the 2010 sale price, you don't have to repay the credit.

    * MSN Money: Biggest-ever tax hikes about to come?

Exceptions: If you or your spouse is in the military and had to sell because of an order to relocate for extended duty, you don't have to repay the credit. If you transfer the home to your former spouse as part of a divorce settlement, the credit-repayment obligation becomes your ex's problem. Finally, neither people who die nor their heirs have to repay the credit.

    * On our blog, 'Listed': Nearly 1 million homebuyers must repay tax credit

Repayment rules for second and third versions
If you claimed a credit for a 2009 or 2010 purchase, the 15-year repayment rule doesn't apply. But if you sell the home or stop using it as your principal residence this year, you generally must repay the full credit or your gain on sale, whichever is smaller. If you have a loss, you don't have to repay the credit. Gain on sale is calculated the same way as in the first version.

Exceptions: For post-2008 purchases, the credit-repayment obligation disappears after you've owned and used the home as your principal residence for more than three years. In addition, the credit-repayment exceptions in the first version of the credit also apply to the second and third versions.

The last word
Credit-repayment rules can be confusing, but you won't have any difficulty following them at tax-return time. Just fill out parts III and IV of the 2010 version of Internal Revenue Service Form 5405, the First-Time Homebuyer Credit and Repayment of the Credit form. Add the credit-repayment amount to your tax bill on the appropriate line of your 1040 form.

Get an advance look at Form 5405 on the IRS website.

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