First-Time Homebuyer Credit Recapture Causing IRS Processing Problems

On March 23, the IRS announced that it is having problems processing tax returns that involve repayment of the IRC § 36 first-time homebuyer credit for 2008 home purchases. The IRS stated that it has assigned additional staff and resources to the issue to resolve it promptly.

One group of affected taxpayers is married couples who filed jointly and claimed the credit on their 2008 return and who filed their 2010 return before February 22 this year with a Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The IRS is manually processing these taxpayers’ returns and says it expects to have most, if not all, of their refunds available by April 5 or the following week.

The IRS is currently unable to process returns for taxpayers who claimed the first-time homebuyer credit and are now reporting the sale or disposition of the residence and taxpayers who are attempting to pay back more than the required amount. Fixing this problem will require changes to the IRS processing systems; the IRS says it is working to make the required changes and test them, but cannot give an exact date when it will be able to process these taxpayers’ returns. However, it says it will be ready to process them sometime in April.

The IRS also has provided steps that taxpayers who are repaying a first-time homebuyer credit can take—if they have not already filed their 2010 tax return—to help speed up processing of their return. Couples who filed jointly in 2008 should file two Forms 5405, one for each taxpayer. Couples who are filing jointly in 2010, but had a different status in 2008 and only one spouse received the credit, should file just one Form 5405, for the spouse who received the credit.

As originally enacted, the first-time homebuyer credit worked like an interest-free loan. Qualifying taxpayers who claimed the credit in the year they purchased a home then had to pay back the credit over 15 years, starting in the second tax year after the home was purchased. If the home is sold before the end of the 15-year recapture period, the outstanding amount of the credit is recaptured at that time (but is limited to the amount of gain from the sale). Subsequent legislation removed the recapture provision from the credit, but only for home purchases after 2008; taxpayers who claimed the credit in 2008 (the first year it was available) must start paying back the credit starting with their 2010 tax returns.