Recapture FTHB Credit

[Snaggletooth]

Yes, another question among hundreds that have already been asked.

Several people on the hook for $500/yr could not afford to stay in their newly-bought house, so they had to move out into an apartment on Bleeker Street and rent out their house on which they owe so much (plus $7500).

On the day they move out and rent their house, are they subject to the recapture of paying the balance? Or are they allowed until the house ceases to be their residence under the 5-year rule?

What if they sell their house in 2012 for a substantial loss, but they moved out and rented in 2010? Does the above mean the loss will not bail them out of the repayment which became due upon the point of renting??

[BP.]

http://www.irs.gov/uac/First-Time-Homebuyer-Credit-Questions-and-Answers:-Homes-Purchased-in-2008

Q & A might be of help.

[Snaggletooth]

Two Events???

Thanks, but I have read much of the IRS-propogated material, and am interested in other interpretations which may open the door to relief.

For example, if converted to a rental, they have to repay. If they sell for a loss, they don't have to repay. Both events are reported for the year it happens. What if both of the abovementioned events happen in the same year??

"If the home ceases to be the main residence..." What determines this, a temporary relocation to Idaho, definition of "main residence" for section 121 disposal, etc...

any other links??

[BP.]

The original post had the two events happening 2 years apart. If in the same year, I might be inclined to go with the "sold-at-a-loss" rule.

definition of "main residence"?

Defined in the 5405 instructions: "Your main home is the one you live in most of the time."

"If the home ceases to be the main residence..." What determines this?

Your questions seem to be answered by these two Q&A's from the IRS FTHB FAQ:

"Q. When does my home stop being my main home?

A. Your home stops being your main home when:
•You sell the home.
•You transfer the home to a spouse or former spouse in a divorce settlement.
•You convert the entire home to a rental or business property.
•You converted the home to a vacation or second home.
•You no longer live in the home for the greater number of nights in a year.
•Your home is destroyed or condemned.
•You lose your home in foreclosure.
•You die.

There are certain exceptions, but generally, if the home is no longer your main home. you must repay the entire remaining part of the credit on your next tax return.

Q. What are the exceptions where I may not have to repay the full credit?

A. The exceptions where you may not have to repay the full credit are:
. . .

•If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain, if any, on the sale. Note: when calculating gain or loss on your main home if you received the credit, you reduce your basis by any remaining amount of the credit. See Publication 551, Basis of Assets, for more information."

are they allowed until the house ceases to be their residence under the 5-year rule?

Doesn't appear that way.

[Snaggletooth]

Thank You

Very good and relevant answers BP. Thank you.

[JohnH]

So what happens if a taxpayer took the FTHB credit, then in a later year converted the residence to a rental, and in a still later year you acquire them as a client? Upon checking, you discover that they did not repay the full amount due in the year it was converted to a rental.

It appears to me that your obligation is simply to inform them of the requirement that they need to amend the return for the conversion to rental and you have no further responsibilities. Am I correct?

[mactoolsix]

So what happens if a taxpayer took the FTHB credit, then in a later year converted the residence to a rental, and in a still later year you acquire them as a client? Upon checking, you discover that they did not repay the full amount due in the year it was converted to a rental.

It appears to me that your obligation is simply to inform them of the requirement that they need to amend the return for the conversion to rental and you have no further responsibilities. Am I correct?

Yep - I agree - From Cir 230:
§ 10.21 Knowledge of client’s omission. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

Mike

[JohnH]

I guess that'sa situation where an email exchange would come in very handy.

[Snaggletooth]

Update to OP

The results are back from the IRS on the situation presented in the Original post.

In short, without other peripheral information, there are two conflicting treatments:
i) if the former residence becomes a rental, the balance of the FTHB (2008 version) is due upon the next tax return.
ii) if the former residence is SOLD, then the remaining balance is due only to the extent of gain.

Here is what I did:
a) Filed the return with a loss on 4797 upon sale of the home. The loss was calculated with the basis reduced by
the unpaid balance of the FTHBC.
b) Filed the return WITHOUT the repayment of the FTHBC.
c) Filed a paper return to draw attention to the processing of the return.
d) Filed Form 8275 (my first ever) announcing the preparer was taking possible issue with the return, and attaching
an explanation. Objective being for the IRS to process the return by a real person.

Results (at least so far, and they have 3 more years on the statute):
IRS refunded the client and did not charge them back for the FHHB repayment. Processed the return exactly as
I had filed it.

So, in effect we "won", at least so far. IRS did not enclose any correspondence, or any evidence that a conclusion had
been reached - they either a)did not want to put anything in writing to establish a precedent or b)did not care to spend any time
analyzing the return or my Form 8275 or making a decision about it.

I will be the first to admit that if a different IRS employee had processed the return, the results could have been different,
and instead of my courage, candor, and skill as a preparer being responsible for the positive outcome, it's just as
likely just the luck of the draw.

[mactoolsix]

Did you include F5405?

Seems without Form 5405 they will the IRS will be looking for the $500 annual payment on the next return.

Mike

[BP.]

What if they sell their house in 2012 for a substantial loss, but they moved out and rented in 2010?

What if both of the abovementioned events happen in the same year?

I don't think it is clear from the posts whether these events occured in the same or different tax years. Could you kindly clarify? Thanks!

[Snaggletooth]

Answer to BP

Specific answer to the question was the house became a "rental" in 2011 and sold in 2012.

That may lock the client into having to report in 2011, but the "rental" was part of a foreclosure arrangement with an
ultimate sale, and involuntary. More facts to muddy the water. Only thing that was straightforward and clear was the
client moved out of the house in 2011.