How to Get a Foreclosure Purchase Tax Credit

Take advantage of the foreclosure purchase tax credit .

In April of 2008, Congress passed the Foreclosure Prevention Act. Among other features, this act provided a $7,000 tax credit to those who purchase a foreclosed home. This tax credit has since been increased to $8,000 and, unlike other federal tax credit programs for home purchases, does not need to be repaid. The credit does come with one primary stipulation: Buyers must maintain the purchased foreclosure as their primary residence for at least two years. This credit is an excellent way to use extra money for turning that foreclosed house into your home.

Things You'll Need

• Purchased home that had been foreclosed
• Document proving purchase of foreclosed property
• Tax accountant or tax filing software

Instructions

1. Purchase a foreclosed property. The original tax credit incentive was scheduled to expire in November of 2009, but recent legislation has extended it until April of 2010. This gives potential buyers a little more time to find a foreclosed property that will be just right for them and their family. Sadly, there are still plenty on the market, but real estate experts have noted that the market does seem to be leveling off to some extent, so the number of available foreclosures might be decreasing as time passes.

2. Retain all documentation showing the purchase of the home. In the event that questions arise about whether or not you are eligible for the tax credit, you will need any and all information that indicates your rightful purchase of a property that was formerly foreclosed. You lender (should you be using one) should have provided all essential documents in your closing package.

3. Fill out IRS Form 5405, which can be filled out and completed online and then printed out. This form has been designated for the tax credit assigned to foreclosure purchases. Include the basic information about the address of the home, the date of purchase, the purchase price, personal information about income and credit, and affirmation that your new home will be used as the main residence.

4. Verify that the tax credit you are requesting is new. At the end of the form, you will be asked if you received a credit during 2008. The tax credit is paid out over the course of two years. If you are filling out Form 5405 for the first time, you will receive the first payment this year and the other half of the payment next year.

5. Attach IRS Form 5405 to your individual income tax return and submit the items together.

Tips & Warnings

• In the event that you are unable to retain the property as your primary residence for two years, you will either forfeit the tax credit or be required to return at least part of it. Avoid purchasing a foreclosed property and applying for the credit unless you feel confident that you can live in the home for at least two years.

References

• NuwireInvestor.com: The Foreclosure Tax Credit: Blessing or Curse?
• Foreclosure.com: $15,000 and $8,000 Real Estate Tax Credit Information
• IRS.gov