1st time homeowners and recapture

[JenMO]

Client purchased home in Nov 2009 and qualified for the 1st time credit. Now, client is selling this home and purchasing another home in September, 2010 ( for more money, but not over the limit). In the instructions for the Form 5405, line 13F, it says you don't have to repay the credit if you acquire a new main home within 2 years of the event and you own and use it as your main home during the remainder of the 36 month periond. I want to make sure I'm not reading out of context and my client will not have to pay back the $8000. Has anyone one else had this happen?

[JG EA]

The event?

I don't understand for more money but not over the limit.

It sounds like a choice the taxpayer made and not one of the exceptions.

From the instructions for Form 5405. "If the home is destroyed, condemned, or disposed of under threat of condemnation, you do not have to repay the credit if you purchase a new main home within 2 years of the event and you own and use it as your new main home during the remainder of the 36-month period."

OK re-read and see that your client did have an event. So the exception would qualify.

[JenMO]

Client did not spend over $800,000, which I understand disqualifies you from the credit. I wasn't sure if the buying a different house by choice would allow you to not recapture the credit as long as the rest of the rules were followed. The purchase of the new house was work related.

[solomon]

Client did not spend over $800,000, which I understand disqualifies you from the credit. I wasn't sure if the buying a different house by choice would allow you to not recapture the credit as long as the rest of the rules were followed. The purchase of the new house was work related.

If there is no gain on the sale then there is no recapture.

[JenMO]

There was no gain; but for example: $50,000 house $5,000 credit, makes house basis $45,000? Even if they sell for $50,000, (same amount of purchase) I think the credit has to be paid back. Am I correct? I thought originally that if no profit was made, no payback, but I wasn't figuring on reducing the cost of the house by the credit amount. Am I reading wrong?

[solomon]

There was no gain; but for example: $50,000 house $5,000 credit, makes house basis $45,000? Even if they sell for $50,000, (same amount of purchase) I think the credit has to be paid back. Am I correct? I thought originally that if no profit was made, no payback, but I wasn't figuring on reducing the cost of the house by the credit amount. Am I reading wrong?

You are correct that the credit reduces the adjusted basis. The actual wording in the law is as follows: §36(f)(3)

In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1).