Do I have to pay back the $7,500 tax credit if I lose money on my house?

Asked by Rachel, Edina, MN Wed Sep 30, 2009

Let's say I purchased my house in August 2008 and I paid $245,000. My loan amount was $242,000 and now I actually owe $238,000. My next question would be which of those numbers do the tax people base the gain off of - the sales price, loan amount or what I actually owe now?

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Mnboy, , Minneapolis, MN
Fri Oct 2, 2009
I do not know what Kimberly sent you. A gripe I have with my peers is giving out partialy correct, partialy wrong, or just plain bad advice. 2008 credit was not a a real credit but a loan, 2009 is a tax credit. There are rules for both, but different. 2009 does have a three year stay rule. 2008 you have to pay back over 15 years.
Your question was not addressed, you do not have to pay 2008 credit back if your loss was greater than the credit.
Your basis is what you paid + expenses to buy+major improvements(not carpet and paint)+selling expenses.
You will need to fill out proper IRS forms. Your expense to sell will be greater than the tax credit. The 245,000 is the start of your basis. It is for interpretation whether you have to deduct you closing costs from the basis that you already deducted on your 2008 return. Confused? Your costs to sell will be 16,000, which means your loss will be enough to cover the Tax Credit. Good Luck! Fellow Realtors, this is available on the Web, research it.
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Kim Melin, , Edina, MN
Wed Sep 30, 2009
Hi Rachel

That is a great question. I am attaching some information for you to review. The best advice I can give you is to check with your tax preparer.
Because the money must be repaid, isn't the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.

All very complicated...but hope that helps! Please let me know if I can answer or help in any other way.

Kim Melin
Edina Realty
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