Section 36 of the Internal Revenue Code (IRC) provides for a credit for many taxpayers who bought a principal residence in 2008, 2009, or 2010. The amounts of the credit vary depending upon whether the property was purchased in 2008 or was purchased later and, for purchases made after 2008, whether the purchaser qualified for the "long-time resident" exception. Those for subsequent years' purchases generally are not subject to repayment. For credits based on purchases after 2008, acceleration of repayment means that the entire credit must be repaid if taxpayers cease using the purchased properties as their principal residences within the 36 months following the purchase. For credits based on a 2008 purchase, acceleration of repayment means that the outstanding balance of the credit becomes due. In each case, the repayment is calculated and included as tax on the tax return for the tax year in which the property ceased to be the taxpayer's principal residence. There are several exceptions to these repayment provisions. This report addresses the exception for involuntary conversions of the property, as well as the limitation on repayment based on gain (if any) realized on the disposition of the property as it applies to involuntary conversions. Repayment of the Homebuyer Tax Credit After an Involuntary Conversion

Generally, an involuntary conversion will not trigger acceleration of repayment in the tax year in which the involuntary conversion occurs. Under the exception for involuntary conversions, taxpayers who have received the homebuyer tax credit have two years from the date of the involuntary conversion to replace the property and, thereby, avoid acceleration of repayment. For those who purchased their homes in 2008, the involuntary conversion will not suspend their existing duty to repay the credit over a 15-year period. Those who purchased property in 2008 and received the maximum $7,500 credit were required to begin repayment of the credit at $500 per year beginning with their 2010 tax returns. Although the acceleration provision is not triggered in the year of the involuntary conversion, the involuntary conversion must nonetheless be reported to the Internal Revenue Service (IRS) on the tax return for the year in which the involuntary conversion occurs. In some of these cases, repayment may not be necessary due to the limitation based on gain. In this case, the taxpayer who does not replace the principal residence within the two years allowed must determine whether there was a gain or loss realized on the property. When there is a gain, that gain would be compared to the outstanding balance of the homebuyer credit. The smaller of the two would be the amount that is added to tax as accelerated repayment of the credit in the year in which the two-year replacement period expires. Appendix. •    If you do not replace the residence within this two-year period, your credit will be accelerated, but will be reported on the tax return for the tax year in which the two-year period expires. No. No. •    You will need to continue paying your scheduled repayment amount ($500 if the credit was $7,500) in 2011 and 2012. •    If there was no gain, you would not have to repay any more of the credit. •    If the gain was less than the outstanding balance on the credit, your repayment would be the amount of the gain.
Taxpayers who purchased a principal residence in 2008-2010 (and in some cases, 2011) may have qualified for a tax credit under Section 36 of the Internal Revenue Code—the first-time homebuyer credit. This credit was amended several times with changes being made to the amount of the credit, the requirements for qualifying for the credit, and the requirements for repaying the credit. These details are available in CRS Report RL34664, The First-Time Homebuyer Tax Credit, by [author name scrubbed].
Generally, taxpayers claiming the credit based on a 2008 credit are required to repay the credit over a 15-year period beginning with the 2010 tax return. Taxpayers who purchased after 2008 generally are not required to repay the credit.
However, repayment of the credit may be accelerated when the taxpayer no longer uses the property as the principal residence. For those who purchased property in 2008, acceleration means that any outstanding credit balance must be repaid with the tax return for the year in which the taxpayer ceased using the property as the principal residence. For those who purchased after 2008, the credit must be repaid in full if the taxpayer ceased using the property as the principal residence within the 36 months immediately following the date of purchase.
There are several exceptions to the repayment requirements. This report focuses on the exception due to involuntary conversion and the limitation based on gain.
The term "involuntary conversion" includes either the partial or complete destruction of the property due to a casualty such as a fire, flood, or tornado. Alternatively, the term may mean the loss of some or all of the property by theft or condemnation, which would include a sale under threat of condemnation. Generally, an involuntary conversion will not trigger acceleration of repayment in the tax year in which the involuntary conversion occurs.
Under the exception for involuntary conversions, taxpayers who have received the homebuyer tax credit have two years from the date of the involuntary conversion to replace the property and, thereby, avoid acceleration of repayment. However, those who purchased in 2008 will need to continue repaying one-fifteenth of their credit annually in the interim. If a taxpayer does not replace the residence within the allowed two-year period, the outstanding credit balance generally would be included in the tax liability for the tax return for the year in which the two-year period expires. However, repayment of the credit could be limited by the gain realized on the involuntary conversion.
If the taxpayer realized a loss on the involuntary conversion, there would be no obligation to repay the outstanding credit balance. If the taxpayer realized a gain, but the gain was less than the outstanding credit balance, the credit repayment would be limited to the amount of gain. That lower amount would be added to the taxpayer's tax liability for the year in which the two-year period expired. In either case, the taxpayer would have no obligation to repay any remaining credit balance in future years.
This report includes an Appendix with questions that are representative of questions being raised by constituents in areas that have been affected recently by flooding and are applicable to other sorts of involuntary conversions.