I purchased my home in 2008 and received a substantial federal home buyer tax credit, but want out of my house. Do I have to pay the money back?

Q: We live in Tennessee and hate it. We experienced a bad tornado last year, and now there have been tornado warnings issued again. We paid more for our house than it was worth, and have a very high mortgage, but both my husband and I are retired. All in all, it’s a big mess, and we want out of our house; however, we purchased in 2008 and received an $8,000 tax credit. and have read that we’re obligated to repay it if we move out of the house before 3 years are up. We spoke to the IRS, and they said that if we walk away from the home and it goes into a short sale, it might take a while and likely take us past that 3-year mark. How can we get out of this property? We are so confused. 

A: You should consult your tax advisor with respect to repayment of the tax credit, but generally, the new home buyer credits did require that you live in the home as a primary residence for a minimum period of time, typically 3 years, but there may be exceptions. Doing a short sale might be the best option if you are in financial hardship, but it will affect your credit. Consult a local lawyer who can help you structure a short sale and negotiate with the bank.