Have a Tax Question? Ask a Tax Expert
You are correct that the Housing and Economic Recovery Act of 2008 established a tax credit for first-time home buyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.
Normally, the IRS would expect $500 will be due each year from 2010 to 2024.
However, some exceptions apply to the repayment rule.
If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated.
The form 5405 for 2010 is not released yet - so it is not clear how you should report the sale.
In additional - because your mortgage balance was forgiven - it will be reported on the form 1099-C - http://www.irs.gov/pub/irs-pdf/f1099c.pdf
That amount is generally taxable, unless any exemption apply -- you should file a form 982 - to claim an exemption - and might exclude all or part of canceled debt from taxable income.
The Mortgage Forgiveness Debt Relief Act of 2007 allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. You still need to file the form 982 to claim the exclusion.
More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Let me know if you need any help.