Home Buyer Tax Credit - Possible Pitfalls
Recently, I read some articles pertaining to homeowners who took advantage of the Home Buyer Tax Credit and then sold that home within a short amount of time. The common thread was that the homeowner seemed unaware that selling the property, within three years from initial purchase, could result in a significant unexpected tax bill. As real estate professionals, we need to be aware of potential future consequences relative to the Home Buyer Tax Credit so that we can advise our clients to seek professional guidance should the situation call for it.
I believe that during the next three years, we need to ask the following question when meeting with homeowner's who are thinking of selling their home. "Did you take advantage of the Home Buyer Tax Credit when you purchased this home?" Keep in mind, real estate agents do not offer legal or tax advice but we should try to determine if there are any potential issues that could arise if the property is sold.
Sale or Use Change - How many homeowner's are aware that if they sell the home, convert it for business purposes or rent it, the home is no longer considered the purchaser's "principal residence". It's important to know that if the property is sold within three years from initial purchase date, or no longer qualifies as a "principal residence", the homeowner may be required to repay the entire amount of the tax credit.
Destroyed, Condemned or Foreclosed - This also applies to property that was destroyed, condemned or the lender foreclosed on the residence. In this case, the purchaser may have to repay the entire amount of the credit if the purchaser does not acquire a new home within two years.
Sale to Unrelated Third Party - If the purchaser sells the home to an unrelated third party, the credit repayment is limited to the amount of gain on the sale. This provision was put in place to prevent purchaser's that received the tax credit from selling the property immediately. While this provision provides some benefits, it also affects those who may need to move for legitimate reasons such as a job transfer or simply a change in circumstances such as death or divorce.
The above information is deemed accurate but is not guaranteed. Refer to the IRS website (www.irs.gov) for complete details regarding the Home Buyer Tax Credit (Form 5405). I encourage everyone who has purchased a property and received a Home Buyer Tax Credit, to consult a professional prior to selling or converting your property in the next few years.
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Integrity Residential Brokerage, licensed in both Massachusetts and New Hampshire, would be happy to assist you in your home buying or home selling needs. If you, or anyone you know, is considering buying or selling a property, Integrity Residential Brokerage located in Pepperell, MA, would love to hear from you! We strive to offer you the highest level of professional assistance possible making your desires and goals a reality.
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Catherine Condon, Broker MA & NH