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Did you buy a home in 2008 and take the first-time homebuyer credit? Did you sell, or otherwise stop using, the home in 2023? If so, read on. You might need to file Form 5405.
What is Form 5405?
Form 5405 is an IRS form you use to repay the First-Time Homebuyer Credit.
To understand the form, it helps to have a little bit of background. In 2008, the federal government enacted a tax credit for people purchasing their first home. At the time, you needed to use Form 5405 to claim the credit, and the initial legislation required everyone who took the credit to repay it.
The rules later changed. Now, only people who claimed the credit in 2008 for homes they purchased in 2008 have to repay it. And you only need to file Form 5405 this year if the home you purchased in 2008 stopped being your primary residence in 2023.
Who needs to file Form 5405 in 2023?
You need to file Form 5405 with your 2023 taxes if you claimed the First-Time Homebuyer Credit in 2008 and:
- You sold or otherwise disposed of that home for a gain.
- You sold or otherwise disposed of that home for a loss.
- The home you purchased in 2008 was condemned or destroyed.
If you sold the home, placed it in service as a rental, or otherwise disposed of the home, file Form 5405 to repay the total remaining credit amount. However, if your home was destroyed in a disaster or condemned, file Form 5405 to explain why you don’t need to repay your remaining credit.
If these situations do not apply to you and you are simply making your annual installment payment for the credit, you don’t need Form 5405. Instead, you include the current year payment amount directly on Form 1040, Schedule 2.
Do I have to file Form 5405 every year?
No. You only need to file Form 5405 if you sold or disposed of the home you purchased in 2008 during the current tax year. Also, Form 5405 should no longer be needed at all after the 2025 tax year—homebuyers had 15 years to repay the credit starting in 2010.
How to complete Form 5405
Part I: Disposition, Sale, or Change in Usage of Main Home
In this section, you must indicate if you can stop repaying the credit because you meet one of the exceptions to the mandatory repayment rules. Generally, you have to have stopped using the house as your primary residence to meet these exceptions.
- Line 1: Record the date you stopped using the home tied to the First-Time Homebuyer Credit as your main home.
- Line 2: Check this box if you stopped using the home as your main home due to military or U.S. government orders.
- Line 3: Check the box that applies to you. You must check either the box in Line 2 or one of the boxes in Line 3 to qualify to stop making repayments.
If you converted the home to a rental or business usage, you still need to complete Part II.
Part II: Repayment of the Credit
Depending on which box you check in Line 3, you may need to complete Part II.
- Line 4: Enter the amount of the First-Time Homebuyer Credit you claimed when you purchased your home in 2008. Enter this amount even if your home was destroyed, condemned, or under threat of condemnation in 2022 or 2023.
- Line 5: Enter the total value of the credit repayments you’ve made so far.
- Line 6: Subtract Line 5 from Line 4 to calculate your tentative remaining balance on the credit.
- Line 7: If you made money by selling or otherwise disposing of your home, enter the gain—the total amount you made—here.
- Line 8: Follow the instructions the IRS provides with the form (there’s no need for us to retype them, but our Tax Pros understand them if you don’t) to calculate how much of your credit you need to repay. Report this amount on Schedule 2 of Form 1040.
Part III: Gain on Sale or Disposition of Main Home
You only need to complete Part III if you sold your home, your home was foreclosed, or your house was condemned with some sort of payout or other financial award. Part III determines if you ended up making a gain, and how much of your credit you need to repay as a result.
You do not need to complete Part III if you sold your home to your spouse or other related party (including ancestors or descendants like your parents, grandparents, children, or grandchildren, or a company you have a 50% or greater ownership stake in). These transactions do not create a gain for First-Time Homebuyer Credit purposes.
If you need to complete Part III:
- Line 9: Enter how much money you got when you sold your home, or how much you got from insurance or as a condemnation award.
- Line 10: Enter any expenses you incurred related to the home sale or getting the condemnation award.
- Line 11: Subtract Line 10 (your expenses) from Line 9 (your gross proceeds) to get the total gain or loss you got on the sale or disposition of your home.
- Line 12: Follow the instructions to determine what’s known as the adjusted basis for the purchase of the home. The adjusted basis is how much you paid for the home after accounting for things like the original purchase price, closing costs from your initial purchase, and eligible home improvement expenses.
- Line 13: Enter the remaining balance on your First-Time Homebuyer Credit. If you completed Part II, it’s the same as Line 6. If not, subtract the repayments you’ve made so far from the total amount of the credit you claimed in 2008.
- Line 14: This is where you calculate an adjusted basis, which affects how much of the credit you still need to repay. Subtract Line 13 from Line 12.
- Line 15: Finally, subtract Line 14 (your adjusted basis) from Line 11. If it results in a positive number, there's a gain and you must check Box 3b in Part I. You also must continue repaying the credit. However, if the final result is $0 or a negative amount, and your home was destroyed or condemned, or under threat of condemnation, you do not need to repay the remaining credit.
Bottom line: People who took the 2008 First-Time Homebuyer Credit and sold their home at a profit need to file Form 5405 and repay the remaining balance on your credit. People who lost money on the sale of their home or had their home destroyed, condemned, or under threat of condemnation need to file Form 5405 but do not need to repay their remaining balance.
If you need to file Form 5405, or you’re not sure, talk to a Jackson Hewitt Tax Pro and make sure you get all the details right.
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.