Question

After renting an apartment for five years, Todd and Diane purchased a new home on July 1, 2008. On their 2008 joint tax return, they claimed a $7,500 first-time home buyer credit. Answer the following questions relating to the credit. a. Assuming they still live in the home, what amount of credit must Todd and Diane repay with their 2014 tax return? Credit repaid b. Assuming they sell the home in August 2014 for a $27,410 gain, what amount of credit must they pay back with their 2014 tax return? Credit repaid c. Assuming they sell the home in August 2014 for a $4,140 gain, what amount of credit must they pay back with their 2014 tax return? Credit repaid

Answer 1

First time Home Buyer Credit of $7,500 was like an interest free loan for which repayment will start first in the 2010 Federal Tax return and need to be repayed in 15 years i.e $500 per year or in case of sale of the House whole pending amount need to be repayed subject to the maximum of profit on sale of House.

(a) If they continue to live in that house in 2014, they need to repay $500 with 2014 tax return.

(b) If they sell the home in 2014 for a gain of $27410, they need to repay the balance amount of credit pending i.e{$7500 - ($500*4 yrs)}= $5500. (4 years counted as 2010,2011,2012 &2013)

(c) If they sell the home in 2014 for gain of $4140, the amount calculated in (b) above is subject to a maximum limit of gain of $4140. So, lower of $5500 or $4140 i.e $4140 need to be repayed with 2014 tax return.