I was asked this question recently by a home owner and thought that this would start to be a more and more common question as we near the 36 month deadline established by the government when they instituted the Housing and Economic Recovery Act. More specifically, they asked, “What happens to my tax credit if I buy a bigger house and rent out my first home?”
Important question: When did you buy your home? If you purchased your home in 2008 as part of the Housing and Economic Recovery Act of 2008, you have to pay the entire amount back (up to $7500) in 15 installments of $500 as part of your tax returns, starting with your tax return for the year 2010. If you sell your home or it ceases to be your “main” home (i.e. you rent it out), you have to pay the remaining balance back when you file your tax return for the year in which you convert the house from your “main” home.
If you bought your home with the First-Time Homebuyer Credit under the Housing and Economic Recovery Act of 2009 or 2010, then the rules are a little different. You do not have to repay any the tax credit you received (up to $8000) if your house remains your “main” home for 36 months. However, if you sell your house or convert it entirely to a business or rental property, you must repay the full amount of the credit.
Please let me know if you have any questions or there is anything I can help you with in regards to this topic! For much more detailed information on this topic, please see the IRS’s website on the First-Time Homebuyer Credit.
Disclaimer: I am not a CPA and am not offering tax advice. I am not liable for your interpretation of IRS tax law based on this summary. Please consult your CPA for answers and applications for your specific situations.
Under the current economic distress, many U.S. households again see the benefit of renting versus home ownership. Others, unfortunately, have been forced to surrender their homes to financial institutions that hold their mortgages and return to their former status as contented tenants.
These challenges can represent opportunities for investors in residential rental properties. Tax laws favor investors in these properties who can often benefit from tax deductible losses, while maintaining positive cash flows on their properties.
In order to avoid jeopardizing these write-offs under the scrutiny of an Internal Revenue Service audit, it is good to know what an agent will be looking for. The IRS does not hide this information. Numerous audit technique guides are available not only to IRS personnel; they are published on the IRS website for public use. Of interest to investors in residential rental real estate is the Passive Activity Loss Audit Technique Guide. It offers guidance to agents as they consider the appropriateness of loss deductions, the calculation of gains or losses on disposition of investment property, and low-income housing credits, among other chapters.
This Guide may be found at http://www.irs.gov/pub/irs-mssp/pal.pdf.
Prepared by Corey A. Pfaffe, CPA, LLC
IRS Circular 230 Disclosure: To comply with IRS rules, I am required to advise you that, unless expressly stated otherwise, any federal tax advice contained in this communication, including attachments, is not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
September 23, 2011
Kyle Pfaffe, REALTOR®
Keller Williams Realty
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