February 28, 2018 9:41 pm

Homebuyer Credit Recapture Discharged in Bankruptcy

Those who purchased a home on or after April 9, 2008 and before January 1, 2009, were able to claim a first-time homebuyer credit of $7,500. However, the credit is recaptured ratably over a period of 15 years beginning in 2010 through 2024. In other words, $500 must be reported as a recaptured amount (additional tax liability) until fully recaptured. There is no recapture if the homeowner dies or the home is involuntarily converted (e.g., destroyed by a storm). Until now, however, it hasn’t been clear what happens if a homeowner declares bankruptcy.

A homeowner who had claimed the first-time homebuyer credit filed for bankruptcy under Chapter 13. The IRS did not file a proof of claim listing a general unsecured claim for any amount of the first-time homebuyer credit ($4,000 had yet to be repaid). Instead, the IRS argued that the $4,000 debt is a priority tax obligation that can’t be discharged. The court sided with the taxpayer. It noted that the IRS consistently refers to and treats the recapture as a repayment of a loan by the federal government. As such, the IRS possesses a right to payment, but it’s not a tax so it can be discharged (Annette Betancourt, U.S. Bankruptcy Court, W.D. MO, 2/1/18). It should be noted that another bankruptcy court had agreed with the IRS position (In re Bryan, Bankr. N.D. Cal, 2/17/14).

Tax Glossary

Accelerated depreciation

Depreciation methods that allow faster write-offs than straight-line rates in the earlier periods of the useful life of an asset. For example, in the first few years of recovery, MACRS allows a 200% double declining balance write-off, twice the straight-line rate.

More terms