Must estate repay homebuyer tax credit?
Dear Real Estate Adviser,
My father bought a Department of Housing and Urban Development home in March 2010 with help from a $3,700 homebuyer tax credit from the American Recovery and Reinvestment Act of 2009. He mentioned that if he got rid of it within three years, he'd owe back that money. Well, he died this October, and the property passed to me and my sister, and it is now on the market. Will we need to pay back that sum when the house sells or pay it when filing his final taxes?
First though, please accept my condolences on the loss of your dad. I am able to offer you a bit of financial comfort as you go about the often-agonizing business of sorting through all the obligations and issues following the death of your loved one. Your father's estate is not on the hook for the $3,700, it appears. The death of a stimulus credit's recipient dismisses that obligation, according to the Internal Revenue Service.
Backing up a bit, any first-time homebuyer or existing homeowner who bought a new home in 2010 before May 1 was eligible for credits of up to $8,000 or $6,500, which wouldn't have to be repaid subject to certain conditions. The main condition was that the recipient not cease using that home as a principal residence within 36 months of the purchase date.
There were some exceptions, including death and the transfer of the house as part of a divorce settlement, though the receiving spouse would be subject to repayment if she didn't remain in the house to finish out the 36 months. Military personnel or U.S. intelligence personnel who were required to move more than 50 miles are exempt as well. Similarly, if the home was involuntarily damaged and the owner was forced to move, that owner wouldn't have to pay back the credit as long as he or she bought another home within two years.
However, if the owner simply sold it; converted it to a rental, business or vacation property; used it as a second home; lost it to foreclosure; or no longer lived in it the majority of the year for just about any other reason, that owner would be obligated to repay the credit. Important side note to folks who are wrestling with this: If a homeowner incurred a loss on the sale of a home in that 36-month period, excluding the value of the credit, it could be offset against the sum paid to the IRS, up to the amount of the credit.
I might also point out that if your father had claimed the credit on a joint return with his spouse -- who we assume wasn't in the picture given the information you supplied -- she would have been required to repay her half of the credit after his death if she disposed of the home in the 36-month period.
I think there is some confusion here because the IRS states elsewhere on its website that death is indeed one way that a home stops being a main home. But not to worry: While an estate or tax attorney should confirm the status of this obligation, it sounds pretty cut and dried.
You will, however, need to file tax Form 5405 with your father's final return (2012) to clear his stimulus credit obligation from the system.
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