Help for Homebuyers: A Guide to the New First-Time Homebuyer Credit


The first-time homebuyer credit, introduced by the Housing and Economic Recovery Act of 2008, PL 110-289 (the 2008 act), has been substantially modified and clarified by two developments this year: the passage of the American Recovery and Reinvestment Act of 2009, PL 111-5 (the 2009 act), and the issuance of IRS Notice 2009-12 (IRB 2009-6). This refundable credit, as part of the federal government’s overall economic stimulus effort, is intended to enhance buying incentives in the current economy and encourage and aid first-time homebuyers. A first-time homebuyer is defined as an individual (and if married, the individual’s spouse) who has not had an ownership interest in a principal residence in the three-year period ending on the date of purchase (IRC § 36(c)(1)).

A comparison of the basic provisions of the credit as originally enacted by the 2008 act, and as modified by the 2009 act, is shown in Exhibit 1. The 2008 act’s original provisions are generally applicable to purchases made between April 9 and Dec. 31, 2008, and the 2009 act’s provisions apply to purchases made between Jan. 1 and Nov. 30, 2009 (section 36(h)). For 2008 act purchases, the amount of the credit is 10% of the purchase price of the residence, up to $7,500 ($3,750 for married filing separately status) and, for 2009 act purchases, up to $8,000 ($4,000 for married filing separately status) (section 37(b)(1)). The credit is phased out for higher-income taxpayers (section 36(b)(2)).

As originally authorized under the 2008 act, the credit is a virtual no-interest loan, as the taxpayer must repay it as additional taxes in equal annual installments over 15 years, beginning with the second tax year following the tax year of purchase (typically, 2010 for 2008 purchases). This repayment, or general recapture, ceases upon the death of the taxpayer (section 36(f)(4)(A)). The 2009 act removes this repayment feature for purchases made between Jan. 1 and Nov. 30, 2009 (section 36(f)(4)(D)(i)).

Section 36 is written to discourage buyers from “flipping” a purchase for profit. The statute includes accelerated recapture provisions requiring repayment of the credit if the home is resold quickly (section 36(f)(2)). The requirement varies between 2008 act and 2009 act purchases.

Taxpayers who sell a 2008 act home or stop using it as their principal residence before the end of the 15-year period must repay the entire remaining unrecaptured balance of the credit in the year in which the sale or change of use occurs (section 36(f)(2)). If the residence is sold to an unrelated party, the adjusted basis of the residence is reduced by the amount of the unrecaptured credit in determining gain or loss on the sale, and the maximum amount of the remaining credit to be recaptured is capped at the amount of gain on the sale (calculated without regard to the section 121 exclusion) (section 36(f)(3)). A related party is a spouse, ancestor or lineal descendant of the taxpayer and certain corporations, partnerships, exempt organizations and trust fiduciaries and beneficiaries (sections 36(c)(5) and 267(b)).

Example 1. Sarah Smith, a single first-time homebuyer with a modified adjusted gross income (MAGI) of $74,000, purchases her principal residence for $125,000 on Nov. 1, 2008. She claims a $7,500 credit on her 2008 tax return. On Feb. 1, 2018, she sells the home to an unrelated party. She has previously repaid eight years at $500 each year = $4,000 total of the credit, and $3,500 of the credit remains to be repaid.

To determine her gain on the sale, she reduces the home’s basis by $3,500. Exactly how much of the $3,500 unrecaptured credit is repaid by Sarah upon the sale of her home depends on her amount of gain realized on the sale, if any. A loss on the sale would mean that Sarah includes none of the $3,500 on her 2018 tax return. A gain of $1,000 on the sale would require a recapture of only $1,000. A gain of $3,500 or more would trigger recapture of the full unpaid credit balance of $3,500.

Despite the lack of a general recapture or repayment provision on 2009 act purchases, a taxpayer may still be subject to accelerated recapture of the credit if the home is sold or ceases to be used as the taxpayer’s principal residence within 36 months of the date of purchase (section 36(f)(4)(D)(ii)).

Example 2. Sam Smith, a single first-time homebuyer with an MAGI of $65,000, purchases his principal residence for $100,000 on Nov. 1, 2009. He claims an $8,000 credit on his 2009 tax return. On Nov. 1, 2010, he sells his home to an unrelated person. Since his sale is 12 months after his purchase, he is subject to accelerated recapture of the credit.

Similar to Sarah in the first example, exactly how much of that $8,000 Sam recaptures depends on his gain upon sale: no gain on the sale produces no recapture. A gain of $8,000 produces full recapture. Note: Unless any of the exclusions of section 121(c) or (d) apply, such as changes in health or employment or unforeseen circumstances, Sam also will not be able to exclude any of this gain under section 121 because he has not owned the home and used it as his principal residence for two out of the previous five years.

These accelerated recapture rules do not apply upon the taxpayer’s death, except that a surviving spouse of a married couple filing jointly will be required to recapture his or her half of the remaining repayment amount. This is also true of regular recapture under the 2008 act (section 36(f)(5)). Another exception is where there is an involuntary or compulsory conversion of the home and the taxpayer acquires a new principal residence within two years of the conversion.

Yet another exception allows a taxpayer to transfer the home to a spouse or former spouse as a result of divorce. In the latter case, the recapture potential is transferred along with the residence to the transferee spouse (section 36(f)(4)).

Note that when accelerated recapture is applicable because a taxpayer ceases to use a home as a principal residence but for whatever reason does not sell it, the section 121 holding period exceptions for exclusion of gain do not exempt repayment of the credit.

Example 3. Sherry Smith, an eligible first-time homebuyer, properly claimed an $8,000 credit on the July 2009 purchase of her new principal residence. In January 2011, she lost her job and moved back home with her parents, renting her residence to defray the mortgage on the home. Since she has not owned and used her residence as her principal residence for 36 months beginning in July 2009, she must recapture in 2011 the entire $8,000 credit previously claimed.

Example 4. Same as Example 3, except that Sherry is transferred by her employer to another state in July 2010. If she does not sell the home in 2010, then she will recapture the full $8,000, as she no longer uses her home as her principal residence upon her move. If she sells, her recapture may be capped at a lower amount, dependent upon her gain upon the sale (if any).

Under section 36(d) before its amendment by the 2009 act, no credit was allowed to certain taxpayers including nonresident aliens and taxpayers acquiring and then disposing of (or ceasing to use as a principal residence) the home in the same tax year. Under the 2009 act, of course, a taxpayer who disposed of the home in the same tax year would be subject to accelerated recapture, since it would be within the three-year period. Section 36(d) also contained a prohibition on the credit (removed by the 2009 act for 2009 purchases) for taxpayers financing their purchases through tax-exempt mortgage revenue bonds. Also, the 2008 act disallowed the credit to taxpayers eligible for the similar, though less generous, credit under IRC § 1400C for first-time homebuyers in the District of Columbia. The 2009 act denies the section 1400C credit to D.C. taxpayers eligible for the more generous section 36 credit (section 1400C(e)(4)).

The credit is phased out ratably over a $20,000 income range, starting with MAGI of $75,000 ($150,000 for married filing jointly status) in the purchase year (section 36(b)(2)). For this purpose, MAGI is increased for amounts excluded under section 911 (foreign earned income and housing costs) or sections 931 and 933 (income from sources in Puerto Rico and certain U.S. possessions).

Taxpayers claiming the credit should use Form 5405, First-Time Homebuyer Credit. Those who buy a home between Jan. 1 and Nov. 30, 2009, can choose to take the credit on either their 2008 or 2009 tax return (section 36(g)). Taxpayers who have already filed 2008 tax returns may file amended 2008 tax returns. The 2009 act Committee Report (see ¶ 5006) indicates that the waiver of repayment or lack of general recapture requirement applies to all homes purchased in 2009 without regard to whether the credit is claimed on a 2008 or 2009 tax return.


The IRS issued guidance in January 2009 (Notice 2009-12, 2009-6 IRB 446) prescribing how, under section 36(b)(1)(C), the credit may be allocated between two or more eligible co-purchasers of a principal residence who are not married to each other. Any reasonable method may be used, including assigning the credit fully to one co-owner. Or co-purchasers may divide the credit according to their individual contributions toward the purchase price and/or share of any mortgage obligation. Or, for tenants-in-common, they might divide the credit in proportion to their respective ownership interests. Where MAGI phase-out or prior ownership of a residence precludes a purchaser or purchasers from claiming the credit or a portion of it, the entire credit or remaining portion may be allocated to the other purchaser or purchasers.


The notice provides examples illustrating purchases made under the 2008 act by two taxpayers who are not married to each other and who are individually eligible for the credit. In one example, a party contributes three-fourths of the purchase price of the home, and a second party contributes the remaining one-fourth of the purchase price. The notice concludes that (1) either party may take the entire credit, (2) the credit may be allocated equally, (3) the credit may be allocated in three-fourths and one-fourth fashion or (4) any other reasonable method may be used. Another example illustrates how a party who receives an ownership interest from a qualifying purchaser may not be allocated any portion of the credit, because the second party is not a purchaser.



The general eligibility rules for the first-time homebuyer credit were unchanged by the 2009 act, but there are significant differences in the operational and economic aspects of the credit for 2009 purchases. Practitioners should inform their clients about the credit repayment requirements that also continue to apply for 2008 act purchases. Clients who plan for whatever reason to own and use their principal residence for fewer than three years would be well-served to analyze the effects on their financial scenarios of having to repay the credit. The recent law changes may pose challenges for tax preparers, especially during the extended tax filing season, given the fact that taxpayers still have the option of claiming the credit for 2009 purchases on their 2008 returns and that some software might not have been updated for the 2009 act.



  Under the Housing and Economic Recovery Act of 2008, the first-time homebuyer credit became available for homes purchased between April 9 and Dec. 31, 2008. Qualifying homebuyers, meaning those who had not held an ownership interest in a principal residence for the preceding three years, could claim a 10% credit up to $7,500 that must be recaptured over 15 years. If, in any year during that period, the home is sold or ceases to be the taxpayer or spouse’s principal residence, any remaining unrecaptured credit amount generally must be recaptured in full in that year.


  For purchases between Jan. 1 and Nov. 30, 2009, the American Recovery and Reinvestment Act of 2009 increases the maximum credit to $8,000 and eliminates the recapture requirement unless the taxpayer sells the home or stops using it as a principal residence within three years of the date of purchase.


  The recapture amount is further limited to the amount of gain realized on the sale of the home, after adjusting its basis by the amount of unrecaptured credit.


Nell Adkins , CPA, Ph.D., is an associate professor of accounting at the University of Alabama–Birmingham. B. Charlene Henderson, CPA, Ph.D., is an assistant professor at the University of Arkansas in Fayetteville. Their e-mail addresses are, respectively, and




JofA article

Stimulus Act Eases Taxes for Individuals, Small Businesses,” April 09, page 40


On-Site Training

Critical Tax Issues and Money Management Ideas for Your Growing, Middle Income Clients (Acronym #TPESB)


To access On-Site Training courses, go to, click “On-Site Training” and search by “Acronym Index.” If you need assistance, please contact a training representative at 800-634-6780 (option 1).


The Tax Adviser and Tax Section

The Tax Adviser is available at a reduced subscription price to members of the Tax Section, which provides tools, technologies and peer interaction to CPAs with tax practices. More than 23,000 CPAs are Tax Section members. The Section keeps members up to date on tax legislative and regulatory developments. Visit the Tax Center at The current issue of The Tax Adviser is available at


PFP Center and PFS credential

Membership in the Personal Financial Planning (PFP) Section provides access to specialized resources in the area of personal financial planning, including complimentary access to Forefield Advisor. Visit the PFP Center at Members with a specialization in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is also available at


Financial Planning Digest

The Financial Planning Digest is a free monthly e-newsletter that provides current information on personal financial planning topics including the American Recovery and Reinvestment Act of 2009. A link to register is available at



Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.


Black CPA Centennial, 1921–2021

With 2021 marking the 100th anniversary of the first Black licensed CPA in the United States, a yearlong campaign kicked off to recognize the nation’s Black CPAs and encourage greater progress in diversity, inclusion, and equity in the CPA profession.