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The First-Time Homebuyer Tax Credit
Carol A. Pettit
Legislative Attorney
September 30, 2009
Congressional Research Service
7-5700
www.crs.gov
RL34664
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008

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The First-Time Homebuyer Tax Credit

Summary
Unless Congress acts to extend the first-time homebuyer tax credit, November 30, 2009, is the
last day on which a taxpayer may purchase a principal residence and qualify for the credit.
Several bills have been introduced in the 111th Congress that would extend the credit through the
end of 2009 or beyond. These include H.R. 1453, H.R. 1805, H.R. 1993, H.R. 2562, H.R. 2606,
H.R. 2801, H.R. 2905, and H.R. 3389. A number of these and others, including H.R. 2619, H.R.
2655, and S. 740 would allow the credit to non-first-time homebuyers as well, and some would
modify or eliminate the income limitation.
The credit was created in 2008 by the Housing Assistance Tax Act of 2008, part of the Housing
and Economic Recovery Act of 2008 (P.L. 110-289). As originally enacted, § 36 of the Internal
Revenue Code (IRC) created a refundable tax credit for first-time homebuyers who purchased a
principal residence after April 8, 2008, and before July 1, 2009. The American Recovery and
Reinvestment Act of 2009 (P.L. 111-5) modified the credit for taxpayers purchasing homes after
December 31, 2008, and extended it to include purchases through November 30, 2009. First-time
homebuyers generally include individuals who have not had a present interest in a principal
residence within three years before buying the new property. The credit is based on 10% of the
purchase price of the principal residence, but may not exceed $7,500 for residences purchased in
2008. Those purchased in 2009 may result in as much as an $8,000 credit. The credit may be
reduced or eliminated for married taxpayers with income over $150,000 or other taxpayers with
income over $75,000. To be eligible for the credit, taxpayers must purchase property after April 8,
2008, and before December 1, 2009, and use it as their principal residence.
The credit is refundable, but must be repaid if based on a 2008 purchase. For these credits, it is
similar to an interest-free loan with a 15-year payback period that begins two years after the
purchase. However, if the taxpayer sells the property or ceases to use it as a principal residence,
the entire outstanding credit generally becomes due for that tax year. In certain circumstances,
acceleration of the repayment will not be triggered; in others repayment is waived completely.
However, there is no provision to modify the repayment provisions for military personnel who
must abandon the property as their principal residence due to official orders. Similarly, no
exception exists for other taxpayers who must move due to a job transfer. Several bills have been
introduced in the 111th Congress that would provide a waiver of repayment for military personnel
and some others. These include H.R. 1119, H.R. 2398, H.R. 3389, H.R. 3573, and H.R. 3590.
Repayment generally is not required for credits that are based on a 2009 purchase. However, if
the taxpayer ceased using the property as a principal residence within 36 months of the purchase
date, the taxpayer would be subject to the same repayment requirements as taxpayers who
purchased their property in 2008 but ceased using it as their principal residence prior to
repayment of the entire credit. Two bills, H.R. 525 and H.R. 2905, have been introduced in the
111th Congress that would eliminate all repayment requirements. H.R. 1805 would modify the
repayment requirement for 2008 purchases, eliminating it unless the property ceased to be used as
a principal residence within 36 months of purchase.
In mid-2009, the FHA authorized state housing finance agencies and others to arrange advances
of the credit to taxpayers, effectively allowing taxpayers to borrow against the credit if funds
were used for down payments, prepaid expenses, or closing costs. H.R. 1344 would prohibit the
credit for those whose net down payment from non-borrowed funds was less than 5%.
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The First-Time Homebuyer Tax Credit

Contents
Background and Introduction ...................................................................................................... 1
Who and What Qualifies for the Credit? ...................................................................................... 1
Who Is a First-time Homebuyer?........................................................................................... 2
What Is a Principal Residence? ............................................................................................. 2
What Is a Purchase? .............................................................................................................. 3
When Must the Property Be Purchased? ................................................................................ 4
How Much Is the Credit? ............................................................................................................ 5
Dollar Limitation .................................................................................................................. 5
Purchases in 2008 ........................................................................................................... 5
Purchases in 2009 ........................................................................................................... 6
Limitation Based on Modified Adjusted Gross Income .......................................................... 6
Example of Credit Reduction for a Married Couple Who Files Jointly............................. 6
Example of Credit Elimination for a Single Taxpayer ...................................................... 6
When Is the Credit Claimed?....................................................................................................... 7
Who Does Not Qualify for the Credit? ........................................................................................ 8
The Repayment Provision ........................................................................................................... 8
2008 Purchases ..................................................................................................................... 9
When and How Is the Credit Repaid? .............................................................................. 9
When Is Repayment Waived?.......................................................................................... 9
Sale of Property with No Taxable Gain.................................................................... 10
Death of the Taxpayer ............................................................................................. 12
When Is Recapture not Accelerated? ............................................................................. 12
Involuntary Conversions ......................................................................................... 12
Transfers Between Spouses or Incident to Divorce .................................................. 12
No Special Provisions for Military Personnel or Taxpayers with Job Transfers or
Changes in Health...................................................................................................... 13
Military Personnel................................................................................................... 13
Taxpayers Experiencing Job Transfers or Changes in Health ................................... 14
2009 Purchases ................................................................................................................... 15
When and How is the Credit Repaid? ............................................................................ 15
Sale or Change in Use Within 36 Months of Purchase ................................................... 15
Effect on Basis .......................................................................................................................... 15

Contacts
Author Contact Information ...................................................................................................... 16

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The First-Time Homebuyer Tax Credit

Background and Introduction
Unless Congress acts to extend the first-time homebuyer tax credit, November 30, 2009, is the
last day on which a taxpayer may purchase a principal residence and qualify for the credit. At
least two bills, H.R. 1453 and H.R. 1805, have been introduced in the 111th Congress that would
extend the credit through the end of 2009. Other bills would extend the credit through the end of
2010. These include H.R. 1993, H.R. 2606, and H.R. 2801. At least one bill, H.R. 2905, would
extend the credit through the end of 2011. Other bills would extend the time for qualifying
purchases to November 30, 2010, for members of the military who were serving on qualified
official extended duty outside the United States in 2009. These include H.R. 2562 and H.R. 3389.
Additionally, bills have been introduced that would increase the credit,1 supplement or replace it
with a non-refundable credit,2 or extend it to all taxpayers who purchase property that would be
used as their principal residence.3
In response to the housing crisis in 2007 and 2008, the 110th Congress created the first-time
homebuyer tax credit as part of the Housing and Economic Recovery Act of 2008, which became
law on July 30, 2008.4 As enacted, the credit was available only for purchases made after April 8,
2008, and before July 1, 2009. The credit also had two characteristics that made it unlike most
other tax credits—it was refundable,5 and it was repayable; however, the repayment requirement
was subject to certain exceptions. The American Recovery and Reinvestment Act of 20096
(ARRA) modified the first-time homebuyer tax credit for those taxpayers purchasing principal
residences in 2009, increasing the amount of the credit, extending the eligible purchase dates, and
eliminating the repayment provision for many taxpayers.
According to the Internal Revenue Service, the first-time homebuyer tax credit has benefited
more than 1.4 million taxpayers so far. This report addresses the credit both as it applies to 2008
purchases and as it applies to 2009 purchases. The report will also identify some of the recently
introduced bills that propose changes to certain provisions of the existing credit.
Who and What Qualifies for the Credit?
The credit is called the “First-time Homebuyer Credit.” Taxpayers must purchase property within
a prescribed time period, use the property as their principal residence, and meet the definition of

1 See H.R. 1344, H.R. 1453, S. 740. S. 1230, which proposes a separate, non-refundable credit, also proposes a larger
credit amount..
2 See H.R. 1245, H.R. 1295, H.R. 1903, H.R. 2619, S. 1230
3 See H.R. 1119, H.R. 1344, H.R. 1453, H.R. 1805, H.R. 2606, H.R. 2619, H.R. 2655, H.R. 2655, H.R. 2801, H.R.
2905, S. 740. S. 1230, which proposes a separate, non-refundable credit, also proposes that all purchasers of principal
residences be eligible.
4 P.L. 110-289, § 3011.
5 Taxpayers may receive refunds of refundable credits. Additionally, these credits may be used against taxes other than
income tax that are reported on Form 1040: self-employment tax, the additional tax on early distributions from IRAs
and other retirement plans, household employment taxes, etc. In contrast, nonrefundable credits can only be used to
reduce income tax (and, in some cases, alternative minimum tax) to zero. For most of these, any amount that exceeds
income tax is simply lost. For a few, the unused portion can be carried forward to a subsequent year.
6 P.L. 111-5, § 1006.
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“first-time homebuyer” as provided in the law. Several bills introduced in the 111th Congress
would not limit the credit to first-time homebuyers, but would open it to others who were
purchasing property to be used as their principal residence. H.R. 1119, H.R. 1344, H.R. 1453,
H.R. 1805, H.R. 2606, H.R. 2619, H.R. 2655, H.R. 2801, H.R. 2905, and S. 740 are among the
bills that would eliminate the “first-time” requirement.
Who Is a First-time Homebuyer?
One might think that only someone who had never before purchased a principal residence could
be considered a first-time homebuyer. However, the law is not that literal. A first-time homebuyer
is an individual who, during the three-year period ending on the date of the purchase, has had no
present interest in property used as that individual’s principal residence. If the individual is
married, neither spouse may have had such an interest in the three-year period. Ownership of real
property that has not been used as a principal residence within the three-year period does not
disqualify an individual for the tax credit. Examples of such property include vacation homes and
rental or investment properties.
This definition of “first-time homebuyer” is less lenient than the one used for the credit for first-
time homebuyers in the District of Columbia (D.C. Credit), which requires no present interest for
only one year prior to the purchase.7 It is also less lenient than the one used to exclude early
distributions from qualified retirement plans from the 10% additional tax.8 In that case, a first-
time homebuyer is defined as one who has not had a present interest in a principal residence
within the two-year period ending on the date the new property is acquired.
What Is a Principal Residence?
The code section that creates the credit does not explicitly define the term “principal residence.”
The term is said to have “the same meaning as when used in section 121”9 of the Internal
Revenue Code (IRC). Section 121 provides no explicit definition but uses the term and refers to
situations in which property that might otherwise not be thought of as a principal residence will
nonetheless be considered one.10 However, a Treasury regulation provides guidance regarding
property that may be considered a principal residence.11
According to regulation § 1.121-1, to be a principal residence, property must first be used as a
residence. Facts and circumstances determine whether property is used as a residence. The
regulation notes that “a houseboat, a house trailer, or the house or apartment that the taxpayer is
entitled to occupy as a tenant-stockholder in a cooperative housing corporation”12 may be a
residence, but personal property that is not a fixture under local law is not included.

7 26 U.S.C. § 1400C(c)(1).
8 26 U.S.C. § 72(t)(2)(F), (8)(D)(i)(I).
9 26 U.S.C. § 36(c)(2).
10 See 26 U.S.C. § 121(d) (providing special rules for a variety of situations including use or ownership by only one
spouse, ex-spouses, or decedents, as well as involuntary conversions, and non-use during periods of military service or
when the taxpayer is incapable of self-care).
11 26 C.F.R. § 1.121-1.
12 26 C.F.R. § 1.121-1(b)(1).
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A taxpayer may have more than one residence, but can have only one principal residence. When
there is more than one residence, determining which of the residences is the principal one
depends on facts and circumstances. Some of the factors that can be relevant are where the
taxpayer works; where the taxpayer’s family lives; where the taxpayer banks; where the taxpayer
attends religious services; where the taxpayer belongs to recreational clubs; the taxpayer’s usual
mailing address for bills; and the addresses used on income tax returns, driver’s licenses, car
registrations, and voter registrations. When a taxpayer relocates due to employment, the residence
in the new location may or may not be the taxpayer’s principal residence. If the taxpayer’s family
remains in the old location temporarily until a house is sold, a lease expires, or a school year is
completed, the residence in the new location could be considered the taxpayer’s principal
residence. However, if the taxpayer leaves the family indefinitely in the old location and lives in a
small dwelling in the new location, it becomes more likely that the old residence will remain the
taxpayer’s principal residence. Thus, if the taxpayer’s spouse and four children remain in a large
rental property in another location, that rental property might continue to be the taxpayer’s
principal residence even if the taxpayer purchased a small condominium in the new location. The
taxpayer would not be eligible for the first-time homebuyer’s credit on the newly purchased
property if the rental property was still the taxpayer’s principal residence.
Even if a property is used as the taxpayer’s principal residence when it is purchased, it will not
qualify for the credit if the taxpayer ceases to use it as the principal residence before the end of
the tax year in which the residence was purchased.13
What Is a Purchase?
The law defines a purchase as generally being “any acquisition,”14 but excludes certain
acquisitions. As written, the law may be a bit ambiguous. It states the following:
36(c)(3) PURCHASE.—
(A) IN GENERAL.—The term “purchase” means any acquisition, but only if—
(i) the property is not acquired from a person related to the person acquiring such
property, and
(ii) the basis of the property in the hands of the person acquiring such property is not
determined—
(I) in whole or in part by reference to the adjusted basis of such property in the
hands of the person from whom acquired, or
(II) under section 1014(a) (relating to property acquired from a decedent).
This can be read to mean that purchases from related parties do not qualify as purchases eligible
for the tax credit if either of the basis provisions in § 36(c)(3)(A)(ii) applies, but could qualify if
purchased from a related party at full fair market value. However, the provision could also be
read to mean that any purchase from a related party is unqualified and that any purchase, even if

13 26 U.S.C. § 36(d)(4).
14 26 U.S.C. § 36(c)(3)(A).
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not from a related party, is unqualified if either of the basis provisions applies.15 This is the
position adopted by the Internal Revenue Service in its various materials.
The “first-time homebuyer credit for District of Columbia” has a similar provision:
1400C(e)(2) PURCHASE—
(A) IN GENERAL—The term “purchase” means any acquisition, but only if—
(i) the property is not acquired from a person whose relationship to the person acquiring
it would result in the disallowance of losses under section 267 or 707(b) (but, in
applying section 267(b) and (c) for purposes of this section, paragraph (4) of section
267(c) shall be treated as providing that the family of an individual shall include only
his spouse, ancestors, and lineal descendants), and
(ii) the basis of the property in the hands of the person acquiring it is not determined—
(I) in whole or in part by reference to the adjusted basis of such property in the
hands of the person from whom acquired, or
(II) under section 1014(a) (relating to property acquired from a decedent).
A recognized tax commentary has interpreted this provision of the D.C. Credit to mean that
purchases from related parties never qualify for that credit.16 However, soon after enactment of
the § 36 credit, it interpreted that credit’s similar provision to mean that purchases from related
parties were only disqualified if either of the basis provisions applies.17 The instructions for Form
8859, which is used to claim the D.C. Credit on the federal tax return, advise taxpayers, “[Y]ou
cannot claim the credit if ... [y]ou acquired your home from certain related persons or by gift or
inheritance.” Similarly, the instructions for Form 5405, which is used to claim the § 36 tax credit,
state “You cannot claim the credit if ... [y]ou acquired your home from a related person.” The
instructions then give examples of “a related person,” which may include corporations or
partnerships in which the taxpayer or a taxpayer’s relative holds a significant interest.18
When Must the Property Be Purchased?
The credit is available only for principal residences purchased after April 8, 2008, and before
December 1, 2009.19 If the residence is being constructed by the taxpayer, it will be considered
purchased on the date when the taxpayer first occupies it.20 Therefore, to qualify for the credit,
any residence constructed by the taxpayer must not only be sufficiently finished to allow

15 For a discussion of basis, including times when the owner’s basis may be determined by the basis of the previous
holder, see CRS Report RL34662, Tax Basis: What Is It? Why Is It Important?, by Carol A. Pettit.
16 Stand. Tax Rep. (CCH) ¶ 32,429.035. Available at http://tax.cchgroup.com. It also notes that any property whose
basis is determined by the seller’s basis or through a step-up in basis when inherited does not qualify for the credit.
17 Housing Assistance Tax Act of 2008: Law, Explanation, and Analysis (CCH) ¶ 205. Available at
http://tax.cchgroup.com.
18 For the statutory definition of “related person” as it applies to the § 36 credit, see 26 U.S.C. § 36(c)(5).
19 26 U.S.C. § 36(h). P.L. 110-289 required purchases to be completed before July 1, 2009. P.L. 111-5 extended the
purchase period to include July 1, 2009, through November 30, 2009.
20 26 U.S.C. § 36(c)(3)(B).
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occupancy but must also be occupied by the taxpayer as the principal residence before December
1, 2009.
As indicated in the “Background and Introduction” section of this report, several bills have been
introduced in the 111th Congress that would extend the applicable purchase dates to at least the
end of 2009 for all first-time homebuyers and through November 30, 2010, for certain military
personnel.
How Much Is the Credit?
The credit is calculated as 10% of the residence’s purchase price,21 which is defined as its
adjusted basis in the taxpayer’s hands on the date of acquisition.22 However, the amount of the
credit is limited in two ways—by dollar amount23 and by modified adjusted gross income.24
Dollar Limitation
The credit is currently limited to $7,500 for qualifying 2008 purchases and $8,000 for qualifying
2009 purchases. Three bills introduced in the 111th Congress, H.R. 1344, H.R. 1453, and S. 740,
would increase the limit to $15,000. Another bill, S. 1230, proposes a non-refundable $15,000
credit.
Purchases in 2008
The credit cannot be more than $7,500 for residences purchased in 2008. For married couples
filing separate returns, it is limited to $3,750 each.25 When unmarried individuals purchase
property together, with each using it as a principal residence, the total amount claimed between
them cannot exceed $7,500. The law states that the credit “shall be allocated among such
individuals in such manner as the Secretary may prescribe.”26 The instructions for Form 5405
state that “[i]f two or more unmarried individuals buy a main home, they can allocate the credit
among the individual owners using any reasonable method” so long as the total amount allocated
does not exceed the allowable credit. The instructions note that “[a] reasonable method is any
method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim
that part of the credit.”

21 26 U.S.C. § 36(a).
22 26 U.S.C. § 36(c)(4).
23 26 U.S.C. § 36(b)(1).
24 26 U.S.C. § 36(b)(2).
25 There is no indication of how the total credit can be allocated within this limit. For a credit of $7,500, the credit must
be allocated equally between the spouses to remain within the limit. However, if the allowable credit is less than
$7,500, it would be possible to allocate a larger amount to one spouse than to the other without exceeding the limit.
26 26 U.S.C. § 36(b)(1)(C).
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Purchases in 2009
The dollar limitation was raised to $8,000 for purchases in 2009. This means that married couples
filing separate returns may allocate no more than $4,000 to each spouse. Unmarried individuals
may allocate the entire amount using “any reasonable method.”
Limitation Based on Modified Adjusted Gross Income
The credit may be reduced or eliminated for taxpayers whose “modified adjusted gross income”
(MAGI)27 exceeds the statutory thresholds. The threshold is $150,000 for taxpayers who are
married and file a joint federal tax return. For all other taxpayers, the threshold is $75,000. The
amount by which the credit is reduced is determined by a ratio, where $20,000 is the denominator
and the numerator is the difference between the taxpayer’s MAGI and the threshold amount. This
ratio is multiplied by the otherwise allowable credit. If the MAGI exceeds the threshold amount
by $20,000 or more, the credit is reduced to zero.
Since the passage of ARRA, at least two bills, H.R. 2801 and S. 740, have been introduced that
would eliminate the income limitation. Another bill, H.R. 1119, would increase the income limit.
Example of Credit Reduction for a Married Couple Who Files Jointly
Assume a married couple with no previous ownership interest in a principal residence purchases a
house costing $425,000. Since 10% of the purchase price is more than $7,500, their credit is
limited to $7,500. If their MAGI is $154,000, their credit would be $6,000. These are the
calculations:
MAGI - threshold = $154,000 - $150,000 = $4,000
$4,000/$20,000 = 20% [reduction ratio]
$7,500 x 20% = $1,500 [reduction]
$7,500 - $1,500 = $6,000 [allowable credit]
Example of Credit Elimination for a Single Taxpayer
Assume a single taxpayer with no previous ownership interest in a principal residence buys a
condominium costing $220,000. The credit is limited to $7,500 since 10% of the purchase price
would be greater than $7,500. If the taxpayer’s MAGI is $95,000, the credit would be eliminated.
These are the calculations:
MAGI - threshold = $95,000 - $75,000 = $20,000
$20,000/$20,000 = 100% [ratio]
$7,500 x 100% = $7,500 [reduction]
$7,500 - $7,500 = $0 [allowable credit]

27 “Modified adjusted gross income” (MAGI) is a term used in a number of tax situations and generally has a specific
definition for each situation. Section 36 defines it as being adjusted gross income plus income earned abroad and
excluded from income, 26 U.S.C. § 911; income excluded by residents of Guam, American Samoa, and the Northern
Mariana Islands, 26 U.S.C. § 931; and income excluded by residents of Puerto Rico, 26 U.S.C. § 933. “Adjusted gross
income” is total income minus adjustments (the bottom line of page 1 of Form 1040).
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When Is the Credit Claimed?
The credit is claimed on the tax return for the tax year in which the property is purchased.28
However, taxpayers who purchase a principal residence in the first 11 months of 2009 may
choose to treat the property as if it had been purchased in 2008.29 A taxpayer purchasing an
eligible property before filing the 2008 tax return would be able to claim the credit on the original
return for 2008. If a taxpayer had already filed the 2008 tax return, an amended return could be
filed to claim the credit. Taxpayers choosing to claim the credit for their 2009 purchase on their
2008 tax return would still be able to claim up to $8,000 as their credit even though the limit for
2008 purchases is $7,500.
The advantage to claiming the credit on the 2008 tax return is that the credit could produce a
refund sooner than if it were claimed on the 2009 return. In the case of a taxpayer who would
otherwise have a balance due on the 2008 return, claiming the credit for 2008 would reduce or
eliminate that balance due. The credit for a 2009 purchase generally does not have to be repaid,
and claiming the credit on the 2008 return would not change this.
Taxpayers choosing not to claim the credit for their 2009 purchase on their 2008 tax return could
still effectively receive their credit before filing their 2009 return. To do this, they would adjust
the amount they pay toward their federal taxes for the remainder of the year. For taxpayers with
wage income, this can be done by filing a new Form W-4 with the employer, increasing
withholding allowances to adjust withholdings so that the total withheld for the year is reduced by
an amount equal to their anticipated credit. Taxpayers who must pay quarterly estimated taxes can
make similar adjustments to their quarterly payments. However, to avoid a possible penalty on
underpayment of estimated taxes, they should adjust the payments equally rather than reducing
the payment in early quarters by the entire amount of the credit.
In mid-2009, the FHA announced a program that would allow homebuyers to “sell” their tax
credits and thereby effectively receive the money prior to the purchase so that it could be used
toward the down payment, prepaid expenses, and closing costs.30 FHA-approved entities and
federal, state, and local governmental agencies may “purchase” the credits. A number of state
housing finance agencies (HFAs)31 are offering short-term loans that can be repaid with the credit
when the taxpayer receives it. Some loans may have no interest, and others may have very low
interest. Additionally, some may require a monthly payment, but others may be “silent” and
require only a lump sum payment when the credit is received.

28 26 U.S.C. § 36(a).
29 26 U.S.C. § 36(g).
30 See FHA First-Time Homebuyer Tax Credit Mortgagee Letter 2009-15 at http://portal.hud.gov/portal/page/portal/
FHA_Home/lenders/mortgagee_letters/2009_mortgagee_letters/09-ML-15%20Using%20First-
Time%20Homebuyer%20Tax%20Credits.pdf.
31 For a listing, by state, of available loan programs, see http://www.ncsha.org/about-hfas/hfa-programs/-first-time-
homebuyer-tax-credit-loan-programs.
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Who Does Not Qualify for the Credit?
Even those who meet the definition of first-time homebuyer and purchase property to use as a
principal residence within the time frame required by the statute may not qualify for the credit.
Those not qualifying for the credit for purchases made in 2008 include
• non-resident aliens;32
• purchasers who finance their new residence with the proceeds of a tax-exempt
mortgage revenue bond;33 and
• those taxpayers (or their spouses) who also qualified for the first-time homebuyer
credit in the District of Columbia in the current taxable year or in any prior
taxable year.34
However, taxpayers who purchase their principal residence in 2009 will still qualify for
the credit even if their new residence was financed with the proceeds of tax-exempt
mortgage revenue bonds.35 Additionally, taxpayers purchasing their property in 2009
would be eligible for the § 36 credit even if they had been eligible to claim the D.C.
credit in an earlier year.36 Purchases in 2009 will not be eligible for the D.C. credit if they
are eligible for the § 36 credit.37
The Repayment Provision
As enacted by the Housing Assistance Tax Act of 2008, the first-time homebuyer tax credit was
essentially a no-interest loan with a 15-year repayment period. This repayment provision is called
“recapture” in the statute.38 This is a term that is used for other credits; however, for those credits
recapture generally is required only when the taxpayer ceases to qualify for the credit.39 In
contrast, for credits based on property purchased in 2008, the entire amount of the allowed first-
time homebuyer credit must be repaid even if the taxpayer continues to live in the property as a
principal residence for 30 years. The American Recovery and Reinvestment Act of 2009 modified
the recapture requirement so that it more closely resembles the recapture provisions for other
credits. For credits based on property purchased in 2009, no recapture of the credit is required
unless, within 36 months of the purchase date, the taxpayer ceases to use the property as the
taxpayer’s principal residence.

32 26 U.S.C. § 36(d)(1) (before passage of P.L. 111-5, this provision was at 26 U.S.C. § 36(d)(3)).
33 P.L. 110-289, § 3011(a) (creating 26 U.S.C. § 36(d)(2), which was deleted by P.L. 111-5, § 1006(e) for purchases
made after December 31, 2008).
34 P.L. 110-289, § 3011(a) (creating 26 U.S.C. § 36(d)(1), which was deleted by P.L. 111-5, § 1006(d)(2) for purchases
made after December 31, 2008). The statute is unclear regarding whether qualification for the D.C. credit (§ 1400C) for
an earlier residence would disqualify the taxpayer for the § 36 credit on a new residence; however, the instructions for
Form 5405 indicate that any prior qualification for the D.C. credit would disqualify the taxpayer for the § 36 credit.
35 P.L. 111-5, § 1006(e).
36 P.L. 111-5, § 1006(d)(2).
37 26 U.S.C. § 1400C(e)(4).
38 26 U.S.C. § 36(f).
39 See, e.g., 26 U.S.C. § 50 (recapture of some or all of the allowed investment credit when property ceases to be
investment credit property within five years of being placed in service).
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Two bills, H.R. 525 and H.R. 2905, have been introduced in the 111th Congress that would
eliminate the repayment provision completely. Under the bills, taxpayers who purchased their
properties in 2008 would no longer be required to repay the credit they had received.
Additionally, no repayment would be required from any purchasers who ceased using their
properties as their principal residences within 36 months of purchase.
2008 Purchases
When and How Is the Credit Repaid?
The standard repayment for credits based on property purchased in 2008 is structured by
recapturing 1/15 of the allowed first-time homebuyer tax credit on the taxpayer’s tax returns for
each of fifteen consecutive tax years.40 For taxpayers who were allowed the maximum credit,
$500 would be added to their tax return as a liability in each of fifteen consecutive tax years. This
recapture begins two years after the tax year in which the property is purchased or deemed to be
purchased.41 Since recapture is reported on the taxpayer’s tax return, the taxpayer is required to
file a tax return for each year in which repayment is due even if otherwise not required to file a
return.42
Recapture may be accelerated if the property is sold or is no longer used by the taxpayer as the
taxpayer’s principal residence.43 Generally, this means that any allowed credit that has not already
been recaptured, must be recaptured in full on the tax return for the tax year in which the house is
sold or otherwise ceases to be used as the taxpayer’s principal residence.
There are two situations in which repayment is waived completely. There are two other situations
in which repayment is not accelerated when the taxpayer ceases to use the property as the
principal residence. Notably, there is no provision applicable to military personnel on active duty
who experience a permanent change of station and must abandon the qualifying property as their
principal residence. Other housing-related provisions of the IRC have included special treatment
for military personnel in that situation.44
When Is Repayment Waived?
Recapture of the outstanding credit may be waived in either of two situations: (1) a sale with no
gain45 or (2) the death of the taxpayer.46

40 26 U.S.C. § 36(f)(1), (7).
41 26 U.S.C. § 36(f)(7).
42 26 U.S.C. § 36(f)(6).
43 26 U.S.C. § 36(f)(2).
44 See 26 U.S.C. § 121.
45 26 U.S.C. § 36(f)(3).
46 26 U.S.C. § 36(f)(4)(A).
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Sale of Property with No Taxable Gain
Generally, gain on the sale of property is determined by subtracting the adjusted basis of the
property from the sale price and then subtracting the sales expenses.47 This remains the same for
determining the taxable gain for properties for which the first-time homebuyer tax credit was
allowed. However, another calculation is required to determine whether the outstanding credit
must be recaptured. In this case, the outstanding credit is subtracted from the adjusted basis of the
property, reducing it. The taxpayer must use this amount as the adjusted basis for a new
calculation of gain to determine whether the outstanding credit must be recaptured in the year of
sale. If the new calculation results in gain, the outstanding credit, up to the amount of gain, must
be recaptured. For this reason, taxpayers who make improvements to their property would be
well-advised to keep careful record of the costs incurred since those costs would increase their
adjusted basis in the property and possibly eliminate the need to repay the credit when the
property is sold.
Example 1—Outstanding Credit Must Be Recaptured. Taxpayer purchases a house for $250,000
and reports $7,500 as the first-time homebuyer credit on Form 1040 in the year of purchase. Two
years later, before repaying any of the credit and without doing anything that would change the
basis of the property, the taxpayer moves to another state and must sell the property. The sales
price is $265,000. Expenses of sale are $15,000. The taxpayer has no gain from the sale for
income tax purposes:
$265,000 Sales
Price
-$250,000 Adjusted
Basis
-$15,000 Sales
Expense
$0 Gain

However, to determine the extent to which the credit must be repaid, another gain calculation is
required. For this calculation, the property’s basis is reduced by the amount of the credit that has
not yet been repaid; therefore for this calculation, the adjusted basis is $242,500 ($250,000 -
$7,500 [the outstanding credit]). Using this number, there is a gain of $7,500, so the entire $7,500
credit must be recaptured on the tax return for the year in which the property is sold.
$265,000 Sales
Price
-$242,500 Adjusted
Basis
-$15,000 Sales
Expense
$7,500 Gain


47 26 U.S.C. § 1001.
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Example 2—Outstanding Credit Must Be Partially Recaptured. Assume the same facts as in the
first example except that the sales price is $260,000 and the property is sold four years after
purchase. For both the second and third years after purchase, $500 of the $7,500 credit would
have been recaptured on the taxpayer’s tax returns each year. Thus, $1,000 has been recaptured,
and the outstanding credit is $6,500. Again, for tax purposes there is no gain.
$260,000 Sales
Price
-$250,000 Adjusted
Basis
-$15,000 Sales
Expense
-$5,000 Loss

However, the basis must be reduced by the outstanding credit to determine the amount of
outstanding credit that must be recaptured. Since $1,000 has been recaptured, only $6,500 of the
credit is still outstanding. When the basis is reduced by $6,500, the result is $243,500 ($250,000 -
$6,500). Using this number in the gain calculation, there is a $1,500 gain. Therefore, $1,500 of
the outstanding credit must be recaptured on the tax return in the year of sale, but the remaining
$5,000 will never be recaptured.
$260,000 Sales
Price
-$243,500 Adjusted
Basis
-$15,000 Sales
Expense
$1,500 Gain

Example 3—No Recapture of Outstanding Credit. Use the same facts as in example 2, except that
the sales expense is $17,000. Again, there would be no gain for tax purposes:
$260,000 Sales
Price
-$250,000 Adjusted
Basis
-$17,000 Sales
Expense
-$7,000 Loss

Again, the basis as reduced by the outstanding credit would be $243,500 ($250,000-$6,500). In
this case, however, the gain calculation to determine the required recapture of the outstanding
credit would result in no gain. Therefore, none of the outstanding credit would be recaptured in
the year of sale.
$260,000 Sales
Price
-$243,500 Adjusted
Basis
-$17,000 Sales
Expense
-$500 Loss

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Death of the Taxpayer
Repayment of the outstanding credit is also waived if the taxpayer dies. For property owned by a
single taxpayer, this provision is clear—recapture of any outstanding credit is waived for tax
years ending after the death of the taxpayer. For property that was purchased by more than one
taxpayer, it appears that only the individual decedent’s portion of the outstanding credit is free
from recapture, even if the credit was claimed by a married couple on a joint return.
The statute states that half of the credit allowed on a joint return is allocated to each spouse for
purposes of the recapture provision. The instructions for Form 5405 indicate that when the credit
was claimed on a joint return, the death of one spouse cancels only that spouse’s half of any
remaining repayment amount.
Where unmarried individuals purchased property together and allocated the credit between them,
each has a separate repayment obligation based on the credit claimed. The death of one of the co-
owners would not change the remaining owner’s own repayment obligation. Similarly, when
couples who are married file separate returns, they each claim a specific amount of credit on
which their separate repayment obligation would be based.
When Is Recapture not Accelerated?
Even though the taxpayer ceases to use the property as a principal residence, recapture of the
credit is not accelerated if either of two circumstances exists: (1) involuntary conversion or
(2) transfer between spouses or incident to divorce.
Involuntary Conversions
When property is destroyed, it is involuntarily converted.48 Likewise, if the property is taken
under eminent domain, it is involuntarily converted. An involuntary conversion also occurs when
a property owner agrees to sell property that is under “threat of condemnation,” which means that
the property will be taken by eminent domain if the owner does not agree to sell. In each of these
situations the taxpayer will cease to use the property as the principal residence. However,
recapture will not be accelerated if a new principal residence is acquired within two years after
the original property was sold or ceased being used as a principal residence.49 The new principal
residence would be substituted for the one that was involuntarily converted, and recapture of the
outstanding credit would proceed along the 15-year scheduled payback period just as if there had
been no disruption in usage. Note that the new principal residence cannot be property that was
owned by the taxpayer before the qualifying residence was involuntarily converted.
Transfers Between Spouses or Incident to Divorce
Generally, property can be freely transferred between spouses with no recognition of gain or loss.
Transfers between former spouses enjoy this benefit only when the transfer is incident to the
divorce between the two.50 The recapture provisions of the first-time homebuyer tax credit allow

48 See 26 U.S.C. § 1033(a).
49 26 U.S.C. § 36(f)(4)(B).
50 See 26 U.S.C. § 1041(a).
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such transfers to occur without accelerating recapture of the outstanding credit, even when one of
the parties ceases to use the property as a principal residence.51 Additionally, the party who
transferred the property is relieved of all subsequent repayment obligations. The party to whom
the property was transferred becomes responsible for both the yearly recapture of the outstanding
credit as well as accelerated recapture if the property is later sold or ceases to be used as a
principal residence.
There is no parallel provision to allow unmarried co-owners to transfer the repayment obligations
to another owner if the property is transferred to the other owner. Additionally, unmarried
taxpayers who transferred their share of the property to a co-owner would have to repay their
share of the credit, to the extent that it was still outstanding, in the tax year in which the transfer
occurred.
No Special Provisions for Military Personnel or Taxpayers with Job Transfers
or Changes in Health
As with the first-time homebuyer credit, another housing-related section of the IRC includes
special provisions for the death of a taxpayer, involuntary conversions, and divorce. However,
that section also includes provisions for military personnel and taxpayers with job transfers or
changes in health. Section 121 of the IRC generally allows taxpayers to exclude the gain from the
sale of a principal residence52 so long as that gain is not more than $250,000 ($500,000 if married
filing jointly) and the taxpayer meets three other conditions:
1. The taxpayer or spouse owns the property for at least two years in the five years
preceding the sale of the property;.
2. The property has been used as the principal residence of either the taxpayer or
spouse for at least two years in the five years preceding the sale of the property.
3. Neither the taxpayer nor the spouse has excluded gain from the sale of another
principal residence within the two years preceding the sale of the property.
The section includes exceptions to the strict application of these requirements for certain
taxpayers, including military personnel and taxpayers who sell their property as the result of a job
transfer or change in health. No similar exceptions that would either waive or delay immediate
repayment are included in the First-time Homebuyer Tax Credit.
Military Personnel
Historically,53 members of the military have been given special consideration regarding the sale
of their principal residences. Military personnel54 serving on qualified official55 extended duty are

51 26 U.S.C. § 36(f)(4)(C)(i).
52 Beginning in 2009, taxpayers cannot exclude gain allocated to “unqualified use” of the property. 26 U.S.C. §
121(b)(4).
53 Currently, IRC § 121 contains provisions for military personnel who sell their principal residences; however, prior to
the enactment of the Taxpayer Relief Act of 2007 (P.L. 105-34), § 121 applied only to taxpayers over age 55 and
provided them with a once in a lifetime exclusion of the gain from the sale of a principal residence (for sales after July
20, 1981, the exclusion was limited to $125,000). For other taxpayers selling their principal residences, any gain
realized upon sale was taxable in the year of sale unless the taxpayer qualified to defer the gain by rolling it over into a
new principal residence. Generally, to avoid current taxation, taxpayers were required to purchase another principal
(continued...)
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allowed to suspend the running of the five-year test period for use and ownership56 required by §
121 for excluding gain from the sale of their principal residence.
There is no provision in the first-time homebuyer tax credit that would waive the immediate
repayment requirement for military personnel who were serving on extended active duty outside
of the geographical area where they had purchased their principal residence and who, therefore,
had ceased using that property as their principal residence. Several bills have been introduced in
the 111th Congress that would provide military personnel with relief from the immediate
repayment requirement. These include H.R. 1119, H.R. 2398, H.R. 3389, H.R. 3573, and H.R.
3590.
Taxpayers Experiencing Job Transfers or Changes in Health
Under § 121 taxpayers who do not meet the time requirements for excluding the gain from the
sale of their principal residence may, nonetheless, exclude some or all of that gain when the sale
is due to “a change in the place of employment, health, or ... unforeseen circumstances.”57 In
those cases, the taxpayer is allowed to prorate the exclusion according to the ration by which the
time-based requirements are met.58 The proration is based on the entire exclusion limit—
$250,000 or $500,000 for couples who are married and file jointly. In many cases, this means that
the taxpayer may exclude the entire gain realized on the sale.
As with military personnel, taxpayers who experience job transfers or changes in health requiring
a move subsequent to their purchase of a principal residence qualifying for the first-time
homebuyer tax credit, find no relief in the provisions of the credit that parallels the relief they find
in § 121 for the exclusion of gain on the sale. CRS is unaware of any bills introduced in the 111th
Congress that would provide such relief for these taxpayers.

(...continued)
residence within two years of the date on which the old residence was sold. 26 U.S.C. § 1034 (repealed 2007).
However, this provision also had special provisions for military personnel on extended active duty after the old
residence was sold. These taxpayers could suspend the running of the two-year replacement period while on active
duty, but the suspension period ended no more than four years after the date of sale; 26 U.S.C. § 1034(h)(1) (repealed
2007); unless the taxpayer was either stationed outside the United States or was required to live in government quarters.
For taxpayers living overseas or required to live in government quarters within the United States, the suspension period
could extend to eight years beyond the date on which the old residence was sold. 26 U.S.C. § 1034(h)(2) (repealed
2007).
54 As used here, “military” includes any of the uniformed services (as defined in 10 U.S.C. § 101(a)(5)).
55 “Qualified official extended duty” is defined in 26 U.S.C. § 121(d)(9)(C). It generally involves being on active duty
for more than 90 days at a duty station that is at least 50 miles from the location of the property that had been used as a
principal residence.
56 26 U.S.C. § 121(d)(9). This provision is also extended to members of the foreign service and intelligence
communities, id., and a similar provision is available for certain Peace Corps employees and volunteers. 26 U.S.C. §
121(d)(12).
57 26 U.S.C. § 121(c)(2)(B).
58 26 U.S.C. § 121(c)(1)(A).
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2009 Purchases
When and How is the Credit Repaid?
So long as a principal residence purchased in 2009 continues to be used as the taxpayer’s
principal residence for at least 36 months following the date of purchase, no repayment of the
credit is required.59 However, if this continuing use requirement is not met, the entire credit must
generally be repaid on the tax return for the tax year in which the taxpayer ceased using the
property as her principal residence, even if the property is not sold.
Sale or Change in Use Within 36 Months of Purchase
Generally, taxpayers claiming a credit for a 2009 purchase must repay the entire credit if they
cease to use the property as their principal residence within 36 months of the date of purchase.
However, just as with credits based on 2008 purchases, in some cases, these taxpayers may be
relieved of some or all of the recapture requirement. These situations are discussed in detail in the
section on 2008 purchases. They include a sale with no taxable gain, the death of the taxpayer, an
involuntary conversion of the property, a transfer between spouses, and a transfer incident to a
divorce.
Effect on Basis
Taxpayers who receive the first-time homebuyers tax credit are not required to reduce the basis of
their residence by the amount of the credit. This differs from most tax credits, which generally
have required taxpayers to reduce the basis of assets on which a credit was based by the amount
of the credit.60 However, there is no general section of the Internal Revenue Code that requires
this basis reduction when claiming a credit. Generally, the sections specific to the credit have a
subsection requiring basis reduction. There is nothing in § 36 that would require an adjustment to
basis.
Since credits based on 2008 purchases must be repaid, there being no adjustment to basis is
harmonious with other tax law61—long-term the taxpayer’s investment is the full amount paid for
the property. However, since the 2009 credit is generally not repaid by the taxpayer, arguably the
taxpayer’s actual investment is less than the amount paid for the property, and basis should be
reduced to reflect the credit received. Nevertheless, § 36 does not require basis adjustment for
these purchases. It is unclear whether the lack of basis adjustment was intentional or inadvertent.


59 The statutory language refers to this as a “waiver of recapture,” stating that 26 U.S.C. § 36(f)(1) will not apply for
credits allowed for 2009 purchases and 26 U.S.C. § 36(f)(2) will apply only if the property ceases to be used as the
taxpayer’s principal residence within 36 months after the date of purchase. 26 U.S.C. § 36(f)(4)(D). Section 36(f)(1) is
the section under which credits based on 2008 purchases must be repaid over a 15-year period. Section 36(f)(2) is the
section that accelerates repayment of the credit when the property is no longer in use as the taxpayer’s principal
residence.
60 See, e.g., 26 U.S.C. §§ 25D(f), 50(c), 1400C(h).
61 26 U.S.C. § 50(c)(4) includes a provision that the basis reduction be reduced by any amount of investment credit that
must be repaid if the asset is disposed of before the end of the recapture period.
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Author Contact Information

Carol A. Pettit

Legislative Attorney
cpettit@crs.loc.gov, 7-9496




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