Foreclosure and Repayment of First-Time Homebuyers Credit

[GAOinLV]

Not sure if I'm on the correct forum, but I'm looking for information about what happens with the 2008 First Time Homebuyers credit repayment if a home is foreclosed. My daughter and her husband purchased a home at the end of 2008 and received the 7500 credit that has to be repayed over 15 years at $500 per year. Their home is underwater now--they paid $125,000 and similar homes in the area are now selling (or not) in the $90,000 range. They would have stuck it out, but now they are in the process of getting a divorce. Neither one of them can afford the house by themselves and they will very likely, almost definitely, have to let it go into foreclosure OR attempt a short sale. At this point, I'm thinking that a short sale might be better for her, since they definitely have hardship and they have no assets whatsoever. Either way, though--the way I read the IRS rules on the credit, they don't have to pay it back under these circumstances unless they have a gain on sale. Their loan was FHA if that makes a difference.
Does anybody else have any experiences with this situation. We are in Henderson, Nevada.

[Evan Bedard]

I have not seen this situation before since the first-time tax credit was only a few years back, but I believe they will loose the $7,500 incentive if they end up going through a short sale or letting the property go..