What this line means
The gain (or loss) from selling the home you purchased with the first-time homebuyer credit. This is the selling price minus your adjusted basis (original purchase price plus improvements, minus the credit claimed). The gain determines whether the full remaining credit balance is due or whether the repayment is limited to the gain amount.
Does this apply to you?
- You sold the home that you purchased using the 2008 first-time homebuyer credit
- You need to calculate the gain to determine whether it limits your accelerated repayment
- You disposed of the home through a sale, foreclosure, or other transfer during the year
Easy to overlook
The first-time homebuyer credit reduced your basis in the home When you claimed the $7,500 credit, your adjusted basis in the home decreased by $7,500. If you purchased the home for $200,000, your adjusted basis for gain calculation purposes is $192,500. This lower basis increases your gain on sale. Filers who forget this basis adjustment understate their gain and incorrectly limit their credit repayment. 1 IRS Publication 523 — Selling Your Home
The Section 121 exclusion ($250,000/$500,000) does not apply to this calculation The gain on line 5 is the full gain before applying the home sale exclusion. Even if you qualify to exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain on your regular tax return, the full gain is used to determine the credit repayment amount. The exclusion shelters you from capital gains tax, not from the credit repayment. 2 IRS Form 5405 instructions — Line 5
Watch out for this
Reporting zero gain when you sold the home at a loss. If you sold the home for less than your adjusted basis, the gain on line 5 is zero (not a negative number). A loss on the sale limits your repayment — if there is no gain, the repayment amount on line 7 can be reduced to zero because the repayment is limited to gain. This is the primary scenario where selling at a loss provides tax relief.
Footnotes
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IRS Publication 523, Selling Your Home, Basis Adjustments. https://www.irs.gov/pub/irs-pdf/p523.pdf ↩
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IRS Form 5405 Instructions, Line 5. https://www.irs.gov/instructions/i5405 ↩