Trying to make it work: Tax Edition
August 8, 2012 8:15 AM   Subscribe

What is the best way around this mortgage and first time homebuyer tax credit situation?

I purchased my first home at the end of April 2010. I qualified for the $8,000 tax credit and received it, which I immediately turned around and dumped into my mortgage. Whoo hoo!

Fast forward to now, August 2012. My living situation has changed and my boyfriend and I are planning on renting a place together starting October 1, 2012 for $3600 a month. I was planning on renting my place out starting October 1st for $2,500 a month. However, in doing paperwork last night, I noticed that the tax credit requires that my place by my permanent residence for 36 months. For whatever reason, I thought it was 24 months! :(

I'm now faced with this ridiculous financial jam. What is the best way around this, where the BF and I can live together and I don't have to repay the credit (is there a way??) living together in my place is not an option because of major space issues.

These are the options that I can currently think of:

1.) Stay put and don't live together until May 2013 - this is going to be a huge hassle and frustrating. However, I wouldn't have to repay the $8k. However, the time/sanity/money/frustration of not having a routine for another 7 months? I don't know if I can do this.

2.) Rent the place that we found for $3600 together (split in half; $1800 a month to me in rent) and rent my place out October 1st for $2500. My mortgage is $2000 now that I've refinanced. I would have to repay the $8k for my 2012 taxes.

3.) Live in my place until January and rent a different place with the BF. I'd have to repay the $8k on my 2013 tax return and we wouldn't be able to move into our dream place. There's no way that they would hold it for us.

4.) Rent the place we found for $3600 together but then don't rent out my place until 2013 - this would delay the repayment of the $8k until I do my taxes in 2014, but I'd have to cover my mortgage ($6000) plus rent ($5400) for three months I don't rent the place out ($11,400).

5.) Move into the BF's house (also not an option due to space issues and enviornmental issues for me) until April, then find a place in the spring?

6.) Other?

What else? What would you do? Help me get through this, if at all. :(
posted by anonymous to Work & Money (10 answers total) 1 user marked this as a favorite
I think you just have to suck it up and figure out what is the more frustrating: living apart for 7 months, or sharing a small place with "major space issues." If it were me, I could probably handle the major space issues if I knew it would end at a certain time. I would not get caught up in the "dream place" - lots of things come on and off the market so I bet in a year you could find something again.
posted by dpx.mfx at 8:42 AM on August 8, 2012 [3 favorites]

living together in my place is not an option because of major space issues.

Sure it is. Especially if it's only for eight months.

But I think you're missing something in your analysis. Yes, if you sell the property before you've lived in it for three years, you'll have to pay $8,000 to the IRS. But if you sell the property, then assuming it hasn't lost value since you bought it, you'll get a whole bunch of money. You should be able to just give it back, no harm no foul. You'll still have come out in the black on the deal, as you saved some $750-ish in interest. So you'll end up with whatever equity you actually paid towards the place, i.e., your down payment and principal payments, plus the $750 you saved in interest.

If you have to play closing costs, this could make this a bit harder, but unless you paid almost nothing down, selling the property should give you enough cash to pay back the government.

Something else to consider: you're almost certainly going to take a bath on the property if you sell before April 2013. Closing costs are real, and odds are really good that you either paid them when you bought the place or will pay them when you sell. Possibly both, which'd suck but does happen. So unless the property has appreciated dramatically in the last three years, you're probably going to lose money on this deal, all things considered. That ought to be another reason to think about toughing it out until April.
posted by valkyryn at 9:19 AM on August 8, 2012

Regarding #4- you are wrong. You would have to pay back the 8k when you filed taxes for 2012. To avoid repayment your house must remain your primary residence for 36 months. IANYL, IANYA.

I went through this. The best financial decision (by a longshot) is for him to move into your house. Why isn't that an option?
posted by murfed13 at 9:23 AM on August 8, 2012

The other option is to be a scofflaw and hope nobody catches you.

Rent your place on a month-to-month tenancy, with no lease. (no paper trail)

Accept rent in cash only.

Don't be put on the lease when your boyfriend rents the new place.

Pay rent in cash only.

Done and done.

Don't claim income from the rental, don't write off anything from the rental.
posted by Ruthless Bunny at 9:34 AM on August 8, 2012 [1 favorite]

If you do choose to have him move in with you, you can put the money saved (which would be a lot for both of you!) into some things that would alleviate the space issues. Examples:

- Renting a storage unit nearby.
- Buying a really excellent closet storage system, like the Container Store Elfa.
- Getting a cleaning service in frequently.
- Changing furniture if necessary, i.e. buying a bigger bed and a smaller couch, or whatever configuration will make it more possible.
- Renting desk space somewhere if either of you works from home or writes or whatever-- I assume you're in a major metro area given the rents you mention and the size issues. This would also help with storage
posted by charmcityblues at 9:39 AM on August 8, 2012 [1 favorite]

Keep in mind the penalties for the above suggestion include possible inaceration and massive fines, not just paying back the 8k.

(Again, IANYL)
posted by murfed13 at 9:45 AM on August 8, 2012 [3 favorites]

Well, if you end up selling for a loss, the loss can offset the 8K. Not the most ideal, but considering the current state of the economy, might be the reality. I'd contact a tax attorney and get more information before you pursue this path, though.
posted by skittlekicks at 10:12 AM on August 8, 2012

You can't write off a loss on your primary residence. I learned this the very very hard way.
posted by dpx.mfx at 10:29 AM on August 8, 2012 [1 favorite]

Sorry I wasn't clear - I was talking only about the credit. From the IRS:

-You may have to repay the full or a part of the credit when:

-You sold your main home to a non-related person or entity. You repay the amount of the credit up to the amount of your capital gain. Note: when calculating gain or loss on your main home if you received the first-time homebuyer credit, you reduce your basis by the amount of the credit. See Publication 551, Basis of Assets, for more information.
posted by skittlekicks at 11:27 AM on August 8, 2012

Why are you considering moving? If it's a job change or transfer, it's worth a shot to check if your employer will reimburse you for moving expenses, to include the anticipated $8k tax penalty.

If you don't NEED to move to a new area, it seems to me that the best option is to have him move in with you for a year if possible (and, if you'd like, he can kick in up to half of your mortgage payment). And maybe after that year you guys will decide to continue living in your house.
posted by tckma at 1:50 PM on August 8, 2012

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