Unearned Interest in the Homebuyer Tax Credit

By :: July 29th, 2011

Taxpayers who took the 2008 tax credit for new homebuyers were unhappy when Congress made the credit much more generous in 2009. People who bought homes in 2008 have to repay the $7,500 credit over 15 years. Those who bought in 2009 or 2010 don’t have to pay their credits back. It turns out that those 2008 buyers have even more to resent: later buyers often received interest on the credits, in many cases for periods before they bought their homes.

It all results from Congress’s attempt to get credits to homebuyers quickly and not require them to wait until the following spring to claim the credits on their tax returns. If you qualified for a credit for a 2009 home purchase, you could amend your 2008 tax return to claim it. Buyers in 2010 could amend their 2009 returns.

That made a lot of sense until the IRS decided that the law required that any payments to taxpayers based on amended returns must include interest starting on the date the original return was either filed or due, whichever is later. That meant that a person who bought a home in November 2009 could claim an $8,000 credit on an amended 2008 tax return and get the $8,000 plus interest from April 15, 2009, until the date the IRS delivered the money. At the 4-percent rate applied at the time, that meant about $200 interest for the period before the house was purchased. A good deal for the homebuyer but not for the rest of us.

Why did the IRS pay interest at all? Because the tax code mandates it unless Congress says otherwise. I’m sure that lawmakers didn’t consider the issue when they drafted the 2009 stimulus bill—they had bigger worries. But Treasury’s Inspector General for Tax Administration estimates that nearly 600,000 homebuyers got more than $76 million in those interest payments through April, 2010, and that almost half of that was for periods before the homes were purchased.

I suspect that people who got the 2008 credit don’t lose sleep over those who bought homes in 2007 and got no credit at all. But they understandably resent those later homebuyers who don’t have to repay the credits and got unearned interest besides. Maybe they’ll experience a bit of schadenfreude, though, when those lucky duckies have to pay tax on that interest.