Mr. Tax Man

Not gonna lie. This tax season was seriously depressing. For the first time in my life, I owed Uncle Sam. Chalk it up to a little mis-understanding on the part of my dear husband, let’s just say our forms have since been adjusted and we intend to never pay the big man ever again. Well ya know, in April at least. 😉

On top of it, we had a pretty complicated tax season as well. We moved, and had to fill out Form 5405, which is a special tax form for the First Homebuyer Tax Credit. We bought our first house in April of 2009, and actually moved a few months shy of the 3-year mark, which is required in order to avoid repayment of the tax credit. But, this credit repayment had a few notable exceptions. After doing some research, I found out that we actually fell into one of those buckets, which is really the only reason why we decided to give the first house the boot a few months early, and set up shop in the next abode.

Since I found it very hard to find reliable and informational content (other than the IRS website) on this topic – I thought I would offer some insights into our process for anyone else who might find themselves in the same boat. I gotta tell you, I feel like I should open a consulting business on the side for the IRS after this stint, cause I had my nose into every tax document known to man. 😉 Our downstairs desk looked like this for quite a while.

DSC_0593

Essentially, if you have a capital loss on the property, you are able to sell the house and avoid repayment of the credit. Since we did enough renovating while in the property to impact the adjusted basis of the house, we were able to slip out from the property, even though we had initially claimed the $8,000 credit. That being said, we had to add up and quantify all eligible modifications made to the property – which meant a LOT of sleuthing for receipts of yester year. And it turns out, Home Depot and Lowe’s don’t keep a personal file for you to just go and grab those babies, oh no, they need the exact date of purchase to be of any assistance. So we went through each. and. every. one of the receipts we had and we added them all up. And we could only include eligible expenses (more on that later), so I had to go through each one and annotate which expenses could actually be included.

Receipts
Receipts

Here is a breakdown of how you determine if you took a capital loss on your property. Really, funny thing, but the IRS pretty much walks ya through it, step by step. Of course it’s super tedious – but, they hold your hand through the process and give you lots of instructions and manuals. They even have a 1-800 number. Yeah, I definitely called that like 12 times, and made them tell me like 120 times that I did not have to repay the credit before I let them get off the phone with me. That part was actually pretty entertaining, because they are all highly trained to give sufficiently ambiguous answers (while still remaining helpful), and I am highly trained in the art of getting to the BOTTOM of things (right, Jay?) so it was hard core funny to listen to the play by play of how these people would deal with me. He, he – snicker.

Here is the form in all it’s glory. The most important part is Part IV, which walks you through the calculation of your capital gain or loss.

Form 5405
Form 5405

The first section of Part IV asks for the selling price of the home, easy enough! Just put in the final sales price of your property.

The second section asks for the selling expenses related to your property. Any commission paid, legal fees, etc are added here.

Then things get a wee bit tricky, since you have to determine the adjusted basis of your property. This is the contracted buying price, plus any eligible renovations  along with costs incurred when you purchased the property.

Finally, you just subtract the tax credit from this total ($8,000), and if the difference between this number, and your amount realized is negative, than you do not have to repay the credit. Still confused? Here is how the numbers broke down for us:

A. Selling Price of Home $152,000.00
B. Selling Expenses(commissions, advertising and legal fees, seller-paid loan charges) = $12,506.79

C. Amount Realized (Subtract line B from line A) = $139,493.21 

D. Adjusted Basis (Assuming $8,480 renovations + settlement fees) = $149,347.75
E. First Time Homebuyer $8,000.00

F. Subtract line E from line D = $141,347.75
G. Subtract line F from line C = -$1,854.54

For us, since we landed up putting almost all of the $8,000 credit into improvements that increased the basis of our property, we were able to count those dollars spent toward the total investment, which altered our overall capital gains calculation. Since we knew that we would always be out the commission on the property, and we figured that the property would probably not appreciate much over the next few months to sway the equation in the other direction, we opted to sell.

The best advice I have after going through this is to hold onto all your home renovation receipts, and check and double check to see what eligible improvements are. For instance painting a room, doesn’t count. Installing a new appliance that stays with the property – that counts. Since we overhauled the kitchen and bathrooms, all these expenses were counted toward the adjusted basis.

2 thoughts on “Mr. Tax Man

  1. I know this is a funny post to comment on (we always do Turbo Tax and are not homeowners…) but I just found your blog through YHL! You have a new reader. Thanks! Looking forward to seeing your bathroom reno…. 🙂 Kate

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