Discussion Archives:First-Time HB Credit - Repayment Question

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Discussion Forum Index --> Advanced Tax Questions --> First-Time HB Credit - Repayment Question


Discussion Forum Index --> Tax Questions --> First-Time HB Credit - Repayment Question

Umk395 (talk|edits) said:

14 January 2011
I have a client who purchased a $200,000 home in 2009 along with her boyfriend. Both names are on the mortgage and deed. They claimed the $8,000 FTHBC. The tax credit was claimed on her 2009 Form 1040.

Now, about one year later they decided to split. My client is willing to quit claim her ownership to the (former) boyfriend and then she will be moving out. He is in the process of refinancing the mortgage under just his name and will assume the $150,000 mortgage. The house is now appraised at $180,000 (declined in value since it was purchased).

Since she claimed the $8,000 and is now moving out (no longer her primary residence), is she required to repay the $8,000 tax credit if the home value has declined since they bought it?

Nightsnorkeler (talk|edits) said:

14 January 2011
Yes, §36(f)

Maybe they should get married first, §36(f)(4)(C)

Umk395 (talk|edits) said:

14 January 2011
So the fact that the property declined in value is irrelevant?

I assume she would need to pay the $8,000 back on her 2011 return (since she is signing the quit claim papers today - in 2011)?

BTW, love the name Nightsnorkeler -- best name on the forum, hands down! Care to share the story behind the name???

Pink Pearl (talk|edits) said:

14 January 2011
Maybe they should get married first, §36(f)(4)(C) girlfriend could jump off of a bridge..death does extinguish the repayment. Are we also assuming that the boyfriend is a related party ? Not sure if that is the case if he wasn't on the original deed and they are splitting up...there are some things that could be done I think.. She did lose money over and above her initial investment...

Umk395 (talk|edits) said:

14 January 2011
They will work on the economics of the split up -- that's already under negotiation. So, they'll make sure that each is made whole on the financial part of the split up, etc.

Yep, death takes it out of the picture, but probably not a realistic scenario.

My question pertains to whether she has to repay the FTHBC if the property has declined in value. Anyone, Buehler, Buehler.....

Pink Pearl (talk|edits) said:

14 January 2011
they'll make sure that each is made whole on the financial part of the split up, etc. Then she hasn't sold it for a loss and she gets to pay it back....decline in value is moot if she sells it and is made whole...

Umk395 (talk|edits) said:

14 January 2011
Not so sure that's correct because breaking even still results in no gain....and thus, back to my original question. If you realize a loss or break even, are you still required to pay back the $8,000 FTHBC?

See, he can make her whole up to her share of the current value of the home -- but that current value is still below the purchase price.

Umk395 (talk|edits) said:

14 January 2011
Looks like she would only have to repay the $8,000 to the extent she has gain. No gain in this case, so no repayment required.

Nightsnorkeler (talk|edits) said:

14 January 2011
§ 36(f)(3) Limitation based on gain

In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1).

Is a quit claim really a sale? That's the question that needs to be asked here. If they bought the property jointly and he is on the title, how can he buy what he already owns?

Nightsnorkeler (talk|edits) said:

14 January 2011
From IRS.gov:

Q. How does the allocation provision work when unmarried taxpayers purchase a home together and both qualify for the first-time homebuyer credit under different tests?

A. Co-purchasers who are not married may allocate the credit using a reasonable method. A reasonable method is any method that does not allocate any portion of the credit to a taxpayer who is not eligible for that portion of the credit. The maximum credit for a taxpayer who qualifies under the long-time resident test is $6,500, and the maximum credit for a taxpayer who qualifies under the first-time homebuyer test is $8,000. One example of a reasonable method is to allocate $6,500 to the long-time resident homebuyer and $1,500 to the first-time homebuyer. (12/14/09)

Would it be possible to amend her 2009 return and not claim the credit, and have the boyfriend amend his 2009 return claiming the credit?

Umk395 (talk|edits) said:

14 January 2011
He only owns 50% of the property, so he would be buying back the other 50% from her. In other words, while she is quit claiming the property to him, she isn't just giving it to him -- he'll assume the entire mortgage. So there are "proceeds" realized by her in the amount of the debt (HER debt) he assumes. In other words, he gets her 50% share via quit claim, but "pays" for her share by assuming her half of the debt. So, yeah, I think the quit claim transaction in this case does result in her "selling" her share of the property.

Umk395 (talk|edits) said:

14 January 2011
From IRS.gov:

Q. How does the allocation provision work when unmarried taxpayers purchase a home together and both qualify for the first-time homebuyer credit under different tests?

A. Co-purchasers who are not married may allocate the credit using a reasonable method. A reasonable method is any method that does not allocate any portion of the credit to a taxpayer who is not eligible for that portion of the credit. The maximum credit for a taxpayer who qualifies under the long-time resident test is $6,500, and the maximum credit for a taxpayer who qualifies under the first-time homebuyer test is $8,000. One example of a reasonable method is to allocate $6,500 to the long-time resident homebuyer and $1,500 to the first-time homebuyer. (12/14/09)

Would it be possible to amend her 2009 return and not claim the credit, and have the boyfriend amend his 2009 return claiming the credit?

Not sure that's on point. I think that reference above (which I saw when I was at IRS.GOV a short time ago researching this) is more related to how you carve up the ORIGINAL tax credit. Turns out she claimed it on her 2009 return. And no, I think they are not at all interested in amending the 2009 return -- the relationship is kaput. My question relates more to the repayment, not how to claim the original credit.

I think the correct answer is that there is no gain, since the quit claim transaction results in her realizing proceeds (her share of the mortgage is assumed by the boyfriend), and she has no realized gain on the sale to him. It looks like the repayment (aka "recapture") is limited to the extent of gain -- which in this case is zero gain. Also, I think the flow of the Form 5405 confirms this as well. This is an unrelated party sale with no gain -- so no repayment.

Pink Pearl (talk|edits) said:

14 January 2011
how much cash ($XXXXX) and how much mortgage debt assumption/removal ($XXXXXXX) will the girlfriend get???

Umk395 (talk|edits) said:

14 January 2011
Zero cash, and he'll assume her half of the $150K mortgage. So when he assumes her half of the mortgage, this would be considered "proceeds" to her.

Pink Pearl (talk|edits) said:

14 January 2011
you said "They will work on the economics of the split up -- that's already under negotiation. So, they'll make sure that each is made whole on the financial part of the split up, etc." If all she gets is relief on 75K mortgage then her original basis of $100,000 less FTHBC of $8,000 equals adjusted basis of $92,000 so she is ok. She loses her down payment, principal payments, improvements, etc. She must really really hate this guy to want to get away that easy.

Jyoung (talk|edits) said:

16 January 2011
Read the Instructions for Form 5405 (Part IV). Home was not destroyed, condemned or disposed of under threat of condemnation. Repayment is due.

Umk395 (talk|edits) said:

16 January 2011
I don't think so -- depends on whether there is a gain. No gain in this case = no repayment. See Part III, Line 13b (No gain -- STOP HERE.)

Umk395 (talk|edits) said:

16 January 2011
The instructions only require you to complete Part IV (Repayment of Credit) if Line 13A, 13C, 13D, 13G, or 13H is checked. Turns out that Box 13B is checked under my set of facts, so you are NOT required to complete Part IV.

Rgtaxservice (talk|edits) said:

16 January 2011
Umk - She'll have to repay the $8,000. If the property were sold the repayment would be limited to the gain. An unrealized loss doesn't play into the picture. The bottom line is that it's not her primary residence anymore for TY2011. The OP reads that she took the entire $8,000 credit - even though she is only a 50% owner?

Umk395 (talk|edits) said:

16 January 2011
See above -- The instructions only require you to complete Part IV (Repayment of Credit) if Line 13A, 13C, 13D, 13G, or 13H is checked.

Repayment is required TO THE EXTENT OF GAIN. Since there is no gain, there is no repayment. Did you take a look at line 13d of Form 5405??

Umk395 (talk|edits) said:

16 January 2011
Yeah - she claimed the 100% of the $8,000 credit.

She prepared her own return. I would have allocated the credit between her and the boyfriend. She wasn't too interested in amending the original return - even though I suggested it. You can lead a horse to water....

Rgtaxservice (talk|edits) said:

17 January 2011
But is a quit claim the same as an actual sale of the residence?

Umk395 (talk|edits) said:

17 January 2011
Yep -- Proceeds = Cash + Debt Assumed by buyer.

Proceeds = Sale

Sale without gain = no repayment of FTHBC

HeartBreak (talk|edits) said:

17 January 2011
I would want to see this look a little more like a taxable disposition. If this were the same scenario, but a gain were involved, would the GF be considering paying tax on the quit claim? I would like to see a sales agreement, a price, an obligation to secure new financing - you know, the things you would normally see in a sale. GF just quit claiming it to BF does not necessarily = sale at a loss. The terms are not clear and we don't know what the consideration is except by verbal statements and possible future events (e.g. paying off old loan). But he's not on the hook to get it refinanced. If he makes min wage he may not qual to refi, so it looks more like a walk away than a taxable disposition.

Umk395 (talk|edits) said:

17 January 2011
You said: "If this were the same scenario, but a gain were involved, would the GF be considering paying tax on the quit claim? I would like to see a sales agreement."

Consider paying tax? Not sure that you have a "choice" when the law says you recapture the credit to the extent of gain. Yeah, I suppose you could cheat, but that's generally not a good idea. :)

And the boyfriend is refinancing (see above facts). Terms are clear because she is relieved of her share of the debt (believe me, she's pretty clear -- and happy! -- about that). And he is on the hook to refinance or he would not be able to "buy out" her share of the debt. He doesn't have $75,000 just sitting around to write her a check for her share. Thus, the refinancing must take place.

He does qualify for a refi, so he's all set there. No problems with the reifnancing. No one is walking away from the property.

Proceeds = Cash + Debt Assumed. Always remembered that mantra from the MST program for some reason.

HeartBreak (talk|edits) said:

17 January 2011
I don't disagree that all things put together it "looks" like a sale, and that it can be inferred that the terms are as you state. But certainly it is not absolute. Without a sales agreement, who is doing what and for what reasons will always be debatable. Under exam, IRS can say "there was no taxable disposition, so you owe the credit back". If you wanted to argue with them, they could just fold their arms until you produce an agreement that clearly states the terms of the sale and the consideration given/received.

You could certainly argue that an agreement is unnecessary because "what the heck else would they be doing", but I would advise a client in these circumstances to have an RE broker draw up a contract and make sure everything happened by the numbers. It's cheap insurance. They are already splitting up, who knows what they will say about one another when the audit letter comes 18 months from now.

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