What this line means
The cumulative total of all credit repayments you have made on prior year tax returns since 2010. Repayment began with the 2010 tax year (the return filed in 2011, two years after the 2008 purchase). Each year, you included 1/15 of the original credit as additional tax on your return. This line tracks how much of the original credit you have already paid back.
Does this apply to you?
- You have been repaying the 2008 first-time homebuyer credit on your tax returns since 2010
- You need to calculate how much of the original credit remains unpaid
- You are checking whether your repayment history is accurate before calculating this year’s installment
Easy to overlook
Your repayment history is on prior year Form 1040, Schedule 2 If you are unsure how much you have repaid, check your tax returns from 2010 through the prior year. The repayment amount appears on Schedule 2 (or the equivalent line on older versions of Form 1040). Adding up these annual amounts gives you the line 2 total. Tax transcripts from the IRS also show each year’s repayment. 1 IRS Form 5405 instructions — Line 2
If you sold the home and repaid the full remaining balance, you are done Selling the home triggers accelerated repayment of the remaining credit balance (reduced by any gain limitation). If you already sold the home and paid the full balance in a prior year, your line 2 equals line 1 and line 3 is zero. You do not file Form 5405 for subsequent years. 2 IRS Publication 523 — Selling Your Home
Watch out for this
Using an incorrect running total for prior repayments. Each year’s installment should be the same amount (1/15 of line 1), and line 2 should be that amount multiplied by the number of years you have been repaying. If your total does not follow this pattern, review prior returns for missed or doubled installments. The IRS tracks the balance independently and will flag discrepancies.
Footnotes
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IRS Form 5405 Instructions, Line 2. https://www.irs.gov/instructions/i5405 ↩
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IRS Publication 523, Selling Your Home. https://www.irs.gov/pub/irs-pdf/p523.pdf ↩