Homebuyer credit subtracted from cost basis?

This may have been discussed previously, but I couldn't find the answer here or at the IRS web site.

Should taxpayers who receive the first-time or long-time homebuyers refundable credit (not the 2008 loan) via Form 5405 reduce their cost basis of the home by the amount of the credit received? I would think so unless the law specifically provides otherwise. Thanks.

Reply to
Green Eggs & Spam
Loading thread data ...

The adjusted basis of your home is reduced by the amount of the first-time homebuyer credit allowed but only to the extent not previously recaptured.

In other words, the answer is Yes.. you reduce basis. However, if you violate the rules of the credit and your credit gets recaptured, you would only adjust basis for the amount of the credit not recaptured.

Reply to
Alan

It's funny that this is not specifically mentioned in the Form 5405 instructions, only the special situation where you sell the home before

36 months is up and the gain is less than the amount of the credit.

By contrast, Form 5695 (Residential Energy Credits) specifically mentions the need to adjust basis by the amount of the credit. Also, Pub 523 specifically mentions several credits resulting in decreased basis, but not this one.

Maybe it's just me, but I think this is not a widely-known or discussed fact among many tax preparers and their clients. I would expect to see software providers and the IRS come up with re-designed sale-of-home worksheets to pick up this credit explicitly.

In other words, do you think anyone was told, "Oh, by the way, this FTHBC will end up being taxable gain to you when you sell the house?" (unless you get a full §121 exclusion)

-Mark Bole

Reply to
Mark Bole

Hey Mark... it took you 13 days to respond........ You forced me to look at the law as originally passed and later amended.

The basis adjustment only happens if under the original rules, you sell before the 15 year payback period ends or under the amended rules you sell before 3 years elapse and become subject to recapture. As such, if you claimed the credit and you get past the old 15 year rule or the new 3 year rule, there is no adjustment to basis when you sell. Only if you fail the time period rule do you make the adjustment to basis. This adjustment is made solely to compute your gain in order to ensure that any credit recapture or early repayment under the 15 year rule does not exceed that gain.

Restating more simply: There is no adjustment to basis when you sell the home as long as the sale takes place after 3 years have passed from the date of purchase or 15 years have passed under the 2008 rules. If 3 years or 15 years have not passed, you only adjust the basis to compute the gain that will limit the amount of any recapture. Your actual gain on the sale is still the selling proceeds less adjusted cost basis as identified in the IRS Pubs and form instructions.

Reply to
Alan

On 2010/11/01 13:25, Alan wrote: [...]

Alan, I really appreciate it, not my intention to make extra work for you. Something came up today that triggered my memory, that's all.

I think you have provided a clear-as-possible explanation of a ridiculously complicated tax law.

[rant] I suspect I am not alone in being weary of the "do-overs" we suffer through with tax laws -- such as education benefits, exceptions to 401(k)/IRA early distribution penalties, residential energy credits, sales tax deductions, NOL's, Form 1040X, and yes, First Time Home Buyer Credit (FTHBC). If the old provisions would "sunset" before the new ones kick in, that would be OK, but they just keep adding layer upon layer.[/rant]

-Mark Bole

Reply to
Mark Bole

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.