Can the $7500 First Time Buyer Credit Be a Bad Thing?
By Gina PogolMortgage Credit Problems Columnist
Blake Asks: Dear Gina, I closed on my home in August of 2008 and took the $7500 tax credit. It was a long commute to work and I have back problems. I fell at work, making the existing condition worse, and finally had to rent a studio across the street from my job in 2009. I am now making payments to rent the studio and also the mortgage on the condo--which is now worth considerably less than I paid for it. I plan to retire in a few years and am really counting on the retirement benefits and on the eventual sale of the condo so I can't quit. My question is can I rent my condo out without having to pay back the first time buyers' credit? I need to offset the cost now that I have rent and a mortgage payment. It won't be long before I am out of savings. I have been through the whole mortgage modification request process with my lender and it declined to help me there. I can offset most of the outgo on the condo if I can rent it out--but I can't afford to return the $7,500 credit.
Gina Says: Dear Blake,I am very sorry about your situation and appreciate that you have written to me. First, you might also consult a disability or worker's compensation attorney. It sounds like you may have some rights that aren't being addressed here. A work-related injury shouldn't be causing you all of these hardships. For the purposes of this article, I'll assume that you have done that already.
The IRS' Point of View--Sell Now and Keep it All
The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If you sell your condo in a short sale or don't make a profit, you would owe nothing to the government and would be allowed to keep your $7,500.
Don't Sell to a Relative
However, if you sell it to a relative, the IRS thinks you're pulling a fast one and the entire amount of the credit becomes due and payable immediately.
Foreclosure? It Probably Won't Cost You
I could find nothing from the IRS Website regarding the specific consequences of foreclosure in relation to the $7,500 credit. So I called them. And the representative told me that a foreclosure is treated like any other sale. So if the bank forecloses and you don't make any profit (because you are so far under water that's likely) when the property is sold, then you don't have to return the credit. You do have to fill out IRS Form 5405 (First-Time Homebuyer Credit) regardless of how you dispose of the property.
Renting Has Costs and Benefits
If, on the other hand, you would prefer to keep the condo and rent it out, the IRS has something to say about that.
"If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property."
The IRS representative I spoke to said that there is no such thing in their code as an involuntary conversion to a rental. So you would have to run the numbers and see if the benefits (rent payments, possible tax losses, and the ability to keep the property until it hopefully appreciates) outweigh the cost of returning the credit now. Keeping in mind, of course, that this credit has to be returned anyway over time if you keep the home.
Good luck and I hope this helps.
Gina
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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