Archive for March 28th, 2011

If you purchased a home in 2009 and received the $8,000 homebuyer’s credit, there is a requirement that the home must remain your principal residence for 36 months, or else the credit will be “recaptured” in the year of disposal (or the year the home ceases to be your primary residence.)

So if you sold your home in 2010 (or 2011 for that matter), you may think you owe the IRS a cool $8,000. Well, slow down there, maestro.

Under Section 36(f)(3), if the principal residence was sold to a person who isn’t related to the taxpayer, recapture is limited to the amount of gain (if any) on the sale. For this purpose, gain is determined by reducing the residence’s adjusted basis by the amount of the credit.

Example: Taxpayer, a first-time homebuyer, purchases a home for $300,000 in 2009 and claims a $8,000 first-time homebuyer credit.  In 2010, the taxpayer sells his home for $320,000 in 2011. He has no adjustments to basis. The taxpayer must recapture the previously taken credit of $8,000 for 2010.

Example 2: Assume that the taxpayer in Example 1 sold his home to an unrelated person for $270,000 in 2010. He has no adjustments to basis. Taxpayer recognizes a loss of $30,000 ($270,000 amount realized minus $300,000 basis). Taxpayer need not pay an additional tax of $8,000 for 2010 since the taxpayer recognized a loss on the sale.

In today’s real estate market, it is very possible that a taxpayer who sells a home in 2010 or 2011 that was purchased in 2009 will in fact recognize a loss on the sale. If that’s the case, you can at least take solace in the fact that you don’t owe the IRS an additional $8,000.

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