You have probably heard about the first-time homebuyer tax credit. Congress enacted the credit in 2008, extended it in the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) and extended and enhanced it again in the Worker, Homeownership and Business Assistance Act of 2009.
On its surface, the credit appears simple but there are some complexities of which you should be aware. In this letter, we will highlight some of the key features of the credit. If you are thinking of purchasing a home or if you have done so recently, please contact our office for more details about the credit.
A taxpayer who is a first-time homebuyer of a principal residence may claim a refundable credit equal to 10 percent of the purchase price of the residence (with a maximum credit of $8,000 ($4,000 for married couples filing separately)). The Worker, Homeownership and Business Assistance Act extends the credit for qualified taxpayers purchasing principal residences on or before April 30, 2010. If a taxpayer enters into a binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the new law treats the credit as not expiring until July 1, 2010.
In good news for all potential homebuyers, the Worker, Homeownership and Business Assistance Act of 2009 also expands the definition of who qualifies as a “first-time” homebuyer. Individuals who have owned and used the same residence as their principal residence for any five consecutive year period during the eight year period ending on the date of the purchase of a subsequent principal residence may be eligible for a reduced credit of $6,500 ($3,250 for married couples filing separately). This reduced credit is available to eligible taxpayers for qualified purchases after November 6, 2009.
The Worker, Homeownership and Business Assistance Act also raises the modified adjusted gross income (MAGI) phase-out’s for the homebuyer credit. Under the new law, the start of the phase-out for single individuals is $125,000 (up from MAGI of $75,000), and $225,000 for joint filers (up from $150,000). The higher phase-out amounts are effective for purchases after November 6, 2009. Purchases on or before November 6, 2009 are subject to the lower phase outs. In either case, however, you have a choice of applying for the credit “as if” the purchase took place on December 31 of the prior year instead of in the year of purchase. This not only accelerates your refund of the credit but also determines whether your qualifications are tested against your MAGI in the year of purchase or in the prior year.
For the first time, however, Congress has set a ceiling on eligibility for the credit based on the purchase price of the home. No credit is allowed if the purchase price of the residence exceeds $800,000. The $800,000 amount is not subject to phase-out and is effective for purchases after November 6, 2009. The residence must be your principal residence. Vacation homes and rental property do not qualify for the credit. You may have heard that the homebuyer tax credit must be repaid. This is only partially correct. When Congress enacted the credit in 2008, it required taxpayers to repay the credit in equal installments over 15 years. The 2009 Recovery Act removed the repayment requirement but only for homes purchased after December 31, 2008 and before December 1, 2009. The Worker, Homeownership and Business Assistance Act continues this treatment for qualified purchases on or before April 30, 2010 (with the exception for binding contracts to July 1, 2010). However, there are still some situations in which the credit must be repaid; for example, if you sell or cease to use the home as your principal residence within 36 months after purchase the repayment requirement may be triggered.
The credit is only available for a completed purchase, meaning that a homebuyer cannot receive an advance payment of the credit. Taxpayers cannot claim the credit before there is a completed sale and purchase of the residence. The sale and purchase are generally completed at the time of closing on the purchase. For a home you construct, the purchase date is considered to be the date you first occupy the home. The IRS is watching for improper advance claims. The Worker, Homeownership and Business Assistance Act gives the IRS more tools to combat fraud and abuse of the credit.
Financing is tight in today’s economy. The U.S. Housing and Urban Development (HUD) will allow some individuals to monetize the credit. Taxpayers using FHA-approved lenders can apply the credit to their down payment in excess of the 3.5 percent of appraised value or their closing costs. State housing agencies can use the credit to advance 100 percent of the down payment. If you have any questions about monetizing the credit, please contact our office.
It’s not uncommon for two or more individuals to purchase a home together, such as a parent and child or domestic partners. The homebuyer credit has the added flexibility of being able to be allocated between two or more owners who are unmarried. The IRS will allow the credit to be allocated using any reasonable method.
Do not let the complexity of the homebuyer tax credit prevent you from taking advantage of this valuable tax incentive. Our office can help you understand the credit and maximize its benefits. We can also help you calculate what additional tax benefits in the form of mortgage interest and real estate tax deductions you may be entitled to as a homeowner. Please contact us if you have any questions about the homebuyer tax credit.
