Today TaxMama® hears from Kelly in the TaxQuips Forum who cares about her friend. “A friend’s home will soon be going into foreclosure. He’s owned the home for 2.5 years and we’re trying to figure out if he’ll have to repay the $8,000 tax credit he received as a first time homebuyer. I’ve read that if the house sells and there’s no gain you’ll owe nothing. If the home is in foreclosure how is a gain calculated? Would it be of any benefit to try to do a short sale on the home versus the foreclosure? He’s planning to file for bankruptcy as well. I’m just wondering if there’s any legal way around the $8,000 repayment?”

Ask TaxMama

Hi Kelly,

Good question.

Let’s see – to avoid paying back the Homebuyers Credit, you must live in place for three years. So, one of the nice things about filing bankruptcy is – you can stay in your house for quite a while longer. If the BK can keep him in the house until the three years are up

1) No worries about repaying $8,000.
2) Free rent for as long as the BK continues.

However, if they don’t stay in the house for three years and end up owing the repayment, the bankruptcy will not help them since the tax return won’t even have been filed yet.

When it comes to selling and short sales, you need to be SURE there is no profit. Remember, you have two things happening when you run short sales, foreclosure or just signing over the property with a deed in lieu of foreclosure.

1) You have the sale – which may be the amount of the loan, or it may include some accrued interest, depending on whether the lender has modified the loan and added interest at the end. That might result in a profit. The profit would mean that some or all of the $8,000 might have to be repaid.
2) You have cancellation of debt income – (perhaps not, if it’s the original loan) which is subject to ordinary taxation.

Back to the Homebuyers Credit. If the house is sold at a loss, or with no profit at all, there won’t be a repayment of the tax credit. More details –

And remember, you can find answers to all kinds of questions about repaying the homebuyers tax credit and other tax issues, free. Where? Where else? At www.TaxMama.com.

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