Let’s set the Wayback Machine to 2008 (sorry, watching Mr. Peabody and Sherman) and revisit the Housing and Economic Recovery Act of 2008: the legislation that gave us the first version of the 1st Time Homebuyer’s Credit. This version did not become the fraud magnet that the later versions did since it required the repayment of the credit over 15 years. And that is the problem.
The first 1st Time Homebuyer’s Credit allowed taxpayers who bought their first home between April and December of 2008 to get a refundable tax credit of 10% of their home’s purchase price up to a maximum of $7,500 on their 2008 tax return. It really wasn’t much of a credit as a short term loan because taxpayers who took advantage of the program had to begin repayment of their “credit” on their 2010 tax returns. The repayment was stretched over 15 years.
There were two other versions of the 1st Time Homebuyer’s Credit. The major difference from the first was that they did not require repayment of the credit if the taxpayer used the home as their principle residence for 3 years.
So, taxpayers who took advantage of the first version of the credit are now making their 5th payment on their 2014 tax return. Someone who received the maximum credit of $7,500 is paying back $500 each year. $500 may not seem like a big amount but they can really get hit if they sell the house. When they sell the house, the taxpayer will have to repay the remaining balance on that year’s tax return. A taxpayer who received $7,500 in 2008 sells their house in 2015. They have repaid $2,500 (2010-2014) and that means they will have to repay the remaining $5,000 on their 2015 tax return. That doesn’t mean adding that $5,000 to their income like a cancellation of debt. They have to pay the whole $5,000 back as a tax.
Many of the taxpayers who took advantage of the 2008 credit were young people buying their first home. Homes which they would like to trade in for a larger model but the repayment will make more expensive.
Recipients of the first version of the 1st Time Homebuyer’s Credit knew they were going to have to repay the credit. But the fact that others who got the credit under later versions don’t have to pay it back is frustrating. And the frustration is compounded by the fact it makes a new home harder to afford.
It’s too much to expect Congress to forgive the debt of those repaying their credit but I have an idea. It will make things more complicated but this is the tax code. How about allowing taxpayers to rollover their repayment into a new home? Give them a fixed amount of time between sale of the first and purchase of their second home. If they go longer, they repay in full. Of course there will have to be all kinds of restrictions on related parties and how long before they can rollover to a new house. Or, maybe make it easier on everyone and just forgive the debt.