First Time Homebuyer - Proof?

[JohnH]

All great points Bart, and among the many reasons I didn't want to fool with the credit.

Also, for the one I did prepare, I composed an email explaining the credit, repayment terms, possible exceptions, etc., which I sent to the client and also photocopied and placed in his Client Copy folder. I think I spent more time preparing that email than I spent on the return, and still don't completely like like the end result. I'm just glad I didn't have a half-dozen more of them to do.

Incidentally, I ran across an interesting side issue on this. Let's say a taxpayer bought a home in 2008 for $100,000 and claimed the $7,500 credit. Then he has a job change or other event which causes him to sell the home in 2009 or 2010. Ignoring the commissions and other expenses of sale, it makes no difference to him whether the house brings $100,000 or $107,500, since he has to repay the lesser of the unrepaid credit or the profit on the sale of the residence.

He only benefits if he can sell the house for more than $107,500, which would be unlikely given the ownership time frame. That would be interesting information for a potential buyer, and if the taxpayer fully understood what's going on, it might enable him to accept a lower offer than he would otherwise. The same principles apply for each subsequent year of ownership, except that in 2011 and beyond, the amount at stake decreases by $500 per year. Yet another example of the unintended disruptions to the normal functioning of the economy when the government steps in to try and influence market activity via the tax system.

[OtisMozzetti]

$500 per year

Given human nature, many will feel that their preparer was not knowledgeable/was not up-to-date/was incompetent. Now they've got the next 15 years to make payments and spread the word about who gave 'em that stinkin' tax advice.
...

For the next 15 years, most of those clients will have $500 smaller refunds or even a balance due.

[AuditorTurnedGood]

Just got a referral call from a potential client. Claimed the $7,500 on her house, and is now going to rent it out and move "back home" to be near family. I informed her of the recapture.

Since this is not a sale, but instead a change from primary residence, how is the value at the date of conversion determined to then figure whether there is any recapture? I only ask since (I think) the recapture amount is limited to the lesser of the credit not yet paid back or gain on disposition.

I haven't taken on this client (and with multiple state returns due to income from two states in addition to the FTHB credit issue, I doubt I will) but I'm still curious about that. Thoughts?

Thanks!
ATG

[JohnH]

That's a very interesting question. especially since the residence is ceasing to be the taxpayer's principal residence but there is no sale. Sounds like she could be in for the "mother of all taxpayer bad breaks".
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* Acceleration of recapture – If a taxpayer disposes of the principal residence for which a first-time homebuyers credit was allowed (or ceases using it as taxpayer's and spouse's principal residence) before the end of the 15-year recapture period, the remaining credit repayment amount is added to the income tax liability of the taxpayer for the year of sale or cessation of use.
* Exceptions to recapture – In the case of a sale of the principal residence to an unrelated person, the increase in tax due to accelerated recapture is limited to the amount of gain (if any) on such sale. For purposes of calculating gain, the adjusted basis of such residence shall be reduced by the amount of the first-time homebuyer credit allowed, to the extent not previously recaptured. In the case of an involuntary conversion, recapture is not accelerated if a new principal residence is acquired within a 2-year period. No amount is recaptured after the death of the taxpayer.
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Once the residence ceases to be her principal residence, she is obligated to repay the full $7,500 credit. But if she holds it for a couple of years as a rental and then sells it, there doesn't appear to be any provision to reduce the repayment if she loses money on the residence or maybe realizes a small profit of $2K - $6K.

I don't mean to sound like a broken record, but to me this is another one for HRB. They have the deep pockets to absorb the loss if they mess this up and get sued. Situations like this are why I keep the HRB address and phone number handy.

[MLINDER42]

First Time Buyer

I disagree with the previous posts if the person has the HUD-1 and last years return that shows no mortgage interest and says they have not owned a house for the required time I am very happy to do the 1040X.The difference is that all I do is taxes and representation there are at least five other preparers in a one mile radius(2JHW 1 BLOCK 2 independents) I have doubled the returns done in the last five years because I give service to the clients all year around.Most of my clients need this rebate and would not be buying with out it.I hope new people will come back to have 2009's return done.

[luke]

mlinder42

I think the point of many of the other posts is that the potential risk (the downside) of these credits outweighs the benefits (upside) because the credits (and repayments etc) are so complicated and ripe for "misunderstandings" by taxpayers who only see the quick buck!

[BOB W]

A client of mine just got his refund, minus the $8,000. "Where's my Refund" says, ""you will receive a notice for addition information need to process your complete refund. When to get your notice you have 30 days to respond or the return will be closed for the credit.""

Followup>>>> My client just rec'd an IRS letter saying they a doing a final review of the FTHB and a refund would be coming within 30 days after their review.

They did not request any additional information or proof.

[ChEAr$]

Where there's a refundable credit,

there's potential for abuse. Just in today from IRS about their first prosecution of a
preparer in Jacksonville, FL for putting a first time homebuyer credit on a return and
it was false!

Added: Now that I've read the other post about this, the only amending I will do to the above
will be substitute the word persecution instead of prosecution. I hopethey will.

[thomtax]

There is no proof needed just fill out 5405 with 1040x and mail it.Most have already closed on purchase.

I am pretty sure of the answer, but this is my first one so I want to double check.

Even though purchasing in 2009, and they qualify for the $8,000, they can file a 1040X for 2008 and claim the credit on the 2008 return. Correct?

[MLINDER42]

Home Buyer

Yes they can but it is taking 3 to 4 months to receive refund