Question

In 2008, I bought my home for $89,000. I made about $10,000 in home improvements. So, my total investment is now $99,000. How much can I sell the house for without having to pay back the $7,500 first time home buyer tax credit?

Answer

You’re required to repay the first time home buyer tax credit if:

  • You have a gain on the sale.
  • You sell the home to an unrelated person.

For first time home buyer tax purposes, calculate your adjusted basis in your home like this:

Original purchase price of the home + settlement costs and improvements – first time home buyer tax credit you originally received (usually $7,500) + credit you’ve repaid = adjusted basis

The credit you’ve repaid is the $2,500 (usually) you were required to repay in 2010, 2011, 2012, 2013, and 2014.

So, based on your information, your adjusted basis would be:

$89,000 (original purchase price) + $10,000 (improvements) – $7,500 (credit) + $2,500 (credit repaid in 2010-2014) = $94,000

If you sell the house to an unrelated person, you won’t have to repay the remaining unpaid credit. This is true as long as you sell the house at the same price or less than your adjusted basis.

To calculate your gain on the sale, you must also subtract these expenses from your sales price:

  • Realtor commissions
  • Advertising
  • Legal fees
  • Seller-paid loan charges

So, your sales price might actually be a bit higher than the basis. This is so you can bring your gain down to your adjusted basis after you account for these expenses.

If your selling price is more than the adjusted basis, you’ll have to repay the credit. You’ll pay the lesser of these:

  • Remaining credit to be repaid
  • Amount of your gain

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