Divorces are often messy — and are even messier when the couple getting a divorce is a same-sex married couple.  One of the messes that can pop up is recapture of the Homebuyer Tax Credits.

Background

The Homebuyer Credits existed in several forms between 2008 and the first part of 2010.  Many people claimed these credits without knowing about the recapture rules that apply if they sell the home or otherwise stop using it as a primary residence.

For people who claimed the $7,500 credit that is repayable over 15 years ($500/year), the outstanding amount of the credit is repayable in the year a taxpayer sells the home or stops using it as their primary residence.

For people who claimed the “newer” versions of the Homebuyer Credits (up to $8,000 for a first-time homebuyer or $6,500 for a “long-time homeowner”), the entire amount of the credit is repayable if, within 36 months of the date of purchase, the taxpayer sells the home or stops using it as their primary residence.

There are exceptions to the repayment rules, including an exception for homes lost in a divorce settlement.

Divorce Exception

The tax code states that a taxpayer does not have to repay the credit if the home is lost to their ex as part of a divorce settlement.  Instead, responsibility for the credit is transferred to the ex.

This is a problem for same-sex married couples, because they are considered unmarried for federal tax purposes.

When Same-Sex Couples Divorce and a Homebuyer Credit is Involved

The divorce exception doesn’t apply to same-sex couples.  Because of the Federal Defense of Marriage Act of 1996 (DOMA), the term “marriage,” for all federal purposes, can only mean one man and one woman.  Period.

So because a same-sex couple is never married in the eyes of the federal government, there is no marriage to dissolve.  Thus, the divorce exception for recapture of the homebuyer credits does not apply.

Example:

Marty and Mary are a same-sex married couple, legally married in Iowa.  They purchased a house in 2010 and Mary claimed an $8,000 First-Time Homebuyer Credit.  They get a divorce in 2011.  In the divorce settlement, Marty gets the house.  Because Mary has not lived in the house for at least 36 months, she will have to re-pay the entire $8,000 credit on her 2011 tax return.  

(NOTE:  If Marty and Mary were an opposite-sex married couple, Mary would not have to re-pay the credit.  Instead, the responsibility for fulfilling the 36-month waiting period on the credit would shift to Marty.  If Marty sells the house before the 36 months is up, then he would have to re-pay the credit.)

In the example above, the only way Mary could avoid recapture of the credit would be if the breakup was amicable enough for Marty to allow her to live in the home at least 1/2 of the year and keep her name on the title until the 3-year waiting period was over.  Otherwise, because of DOMA, Mary is out of luck, regardless of the legality of their marriage in Iowa, and regardless of the fact that she lost the house in a valid legal settlement under state law. 

Conclusion

I am starting to deal with divorces of same-sex couples in my practice, and I have had to deal with this exact Homebuyer Credit recapture issue.  There are other issues, such as alimony and who gets to claim the kids, that I will cover in future articles.

Post-Script for Opposite-Sex Unmarried Couples

The discussion above is also applicable to unmarried opposite-sex couples.  If  a boyfriend and girlfriend bought a home together and one of them claimed the homebuyer credit, that person would have to re-pay the credit if the couple breaks up and the person is no longer living in the house.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”