General recapture for 2008 purchases. For most homes purchased during 2008, the entire national first-time homebuyer credit must be recaptured over fifteen years, with no interest charge. The recapture operates by increasing the taxpayer's federal tax liability by 6 2/3 percent (or 1/15th) of the credit amount for each year during the recapture period. The recapture period is 15 years beginning with the second tax year following the tax year of purchase.
Note: For homes purchased after 2008, this general recapture requirement is waived. However, the accelerated recapture rules (discussed below) apply if the taxpayer sells the home within 36 months after the purchase date.
Accelerated recapture. A taxpayer generally must recapture the first-time homebuyer credit on an accelerated schedule if, during the applicable period, the taxpayer sells the home or the taxpayer (and spouse, if married) ceases to use the home as a principal residence. A home can cease to be the taxpayer's principal residence if the taxpayer sells it or converts it to business or rental property or if the home is destroyed, condemned, or disposed of under threat of condemnation. The recapture rules apply as follows:
For homes purchased during the eligible period in 2008 (after April 8, 2008, and before January 1, 2009), accelerated recapture applies if the disposition of the home or the end of its use as the taxpayer's principal residence occurs before the end of the 15-year recapture period. On the tax return for the year the sale occurs or the use as a principal residence ceases, the taxpayer must recapture the portion of the credit that was not recaptured in prior tax years.
For homes purchased during the eligible period after 2008 (after December 31, 2008, and generally before May 1, 2010), accelerated recapture applies if the disposition of the home or the end of its use as the taxpayer's principal residence occurs during the 36 months beginning on the date the taxpayer purchases the home.
Generally, the amount recaptured is equal to the amount of the credit not recaptured on prior returns. Thus, for homes purchased in 2008, the accelerated recapture amount is equal to the original credit, less any amounts already recaptured during the 15-year recapture period. For homes purchased after 2008, the accelerated recapture amount is equal to the entire credit. However, regardless of the date, the accelerated recapture amount may not exceed the amount of gain from the sale of the residence to an unrelated person. For this purpose, the gain is determined by reducing the basis of the residence by the amount of the credit that was not recaptured before the taxpayer sold the home or ceased to use it as the principal residence.
Returns. For any year in which recapture of the credit increases the taxpayer's income tax, the taxpayer must file an income tax return, even if the taxpayer is not otherwise required to file a return because he or she does not meet the gross income filing threshold. Any omission of a tax increase required by the credit recapture is a mathematical error; thus, the IRS can issue a summary assessment without following the deficiency procedures.
IRS to send letters to taxpayers who claimed the credit. Taxpayers who took the credit in 2008, which must be paid back, will receive a CP03a letter reminding them that repayment starts in 2010. A CP03b letter will be sent to taxpayers claiming the credit in 2009 as a reminder that if they disposed of the home or changed its use, the credit may need to be recaptured. A CP03c letter will be sent to taxpayers when IRS records indicate a change in property 217's use - such as a sale. This may require a repayment of the credit.
For further information, visit the IRS Web site:
This information applies to all years of the UltimateTax software.