Tax Credit to Aid First-Time Homebuyers

To stimulate home sales, Congress first established the first-time homebuyer credit in 2008, then modified it for 2009 (through November 30, 2009), and then extended it again through the middle of 2010 (2011 for certain service members) resulting in some complicated rules.

There are basically two credits, with significantly different sets of rules for each.  In addition, the extension legislation passed in November of 2009 added a new category of home buyer referred to as “long-time residents” and special provisions for U.S. Service Members.  The following is only an overview of these credits and you are encouraged to call this office with specific questions you may have about the credit.

2009 -2010 CREDIT HIGHLIGHTS:

• Credit Amount – The credit amount is based upon whether the buyer is a “first-time homebuyer” or a “long-time resident.”  See definition for both below.  The credit is 10% of the purchase price with a maximum credit of $8,000 ($4,000 for those filing married separate) for “first-time homebuyers” or $6,500 ($3,250 if married filing separate) for “long-time residents.” 

• Repayment Required: If the home is sold or ceases to be the taxpayer’s principal residence within 36 months of its purchase

• Purchased: Between January 1, 2009 and before May 1, 2010 (July 1, 2010 if the taxpayer had entered into a binding contract before May 1, 2010.  Note: Credit provisions are extended for one additional year for members of the uniformed services, U.S. Foreign Service, or an employee of the intelligence community (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

• Home Location: Within the U.S.

• Home Price: For homes purchased after November 6, 2009, no credit is allowed if the home’s purchase price exceeds $800,000.

• Seller: Cannot be purchased from a close relative.

• When Claimed: Credit can be claimed on the taxpayer’s return for the year of purchase or the preceding year

• Financing: Credit can be claimed even if financing is from tax-exempt mortgage revenue bonds

2008 CREDIT HIGHLIGHTS:

• Credit Amount: 10% of the purchase price with a maximum credit of $7,500 ($3,750 for those filing married separate)

• Repayment Required: In 15 equal annual installments beginning in 2010

• Purchased: After April 8, 2008 and before January 1, 2009

• Home Location: Within the U.S

• Seller: Cannot be purchased from a close relative

• When Claimed: Credit can be claimed on the taxpayer’s 2008 return

• Financing: No credit is allowed if the financing for the home is from tax-exempt mortgage revenue bonds.

Details: The following are some additional details that relate to the credit for both 2008 and 2009:

Definition of a First-Time Homebuyer - A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the three-year period before the purchase of the home to which the credit applies. If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period, even if they file as married taxpayers filing separately. Ownership of a home outside the U.S. during the three-year period will not disqualify the taxpayer.

Definition of a Long-Time Resident - Any individual (and spouse, if married, i.e., both must meet qualifications) who have owned the same principal residence for any 5 consecutive years during the 8-year period ending on the date of purchase of a subsequent principal residence.

Coordination with D.C. First-Time Homebuyer Credit – No District of Columbia First-Time Homebuyer Credit is allowed to a taxpayer in 2009 or 2010 who also qualifies for the national first time homebuyer credit (which gives the taxpayer a greater credit).  If a taxpayer was eligible to claim the D.C. first-time homebuyer credit in 2008, or any prior year, the taxpayer was not eligible to claim the national first-time homebuyer credit for 2008.

Service Members Special Extension and Recapture Waiver - Credit provisions are extended for one additional year for members of the uniformed services, U.S. Foreign Service, or an employee of the intelligence community (and, if married, the individual's spouse) who serves on qualified official extended duty service outside of the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.

• Qualifying Period Extension - Extends the credit provisions one year, through April 30, 2011 (June 30, 2011, in the case of an individual who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2011) for any of the individuals listed in the preceding paragraph on qualified official extended duty.

• Recapture Waiver – In the case of a disposition of a principal residence by an individual (or a cessation of use of the residence that otherwise would cause recapture) after Dec. 31, 2008, in connection with Government orders received by the individual (or the individual's spouse) for qualified official extended duty service, no recapture applies by reason of the disposition of the residence, and any 15-year recapture with respect to a home acquired before Jan. 1, 2009, ceases to apply in the tax year of the disposition.

Homes That Qualify - Only the purchase of a main home located in the United States qualifies.  Vacation homes and rental property are not eligible.

Income Limits – The credit is reduced or eliminated for higher-income taxpayers.  The credit is phased out based on the modified adjusted gross income (MAGI).  MAGI is the adjusted gross income plus various amounts excluded from income - for example, certain foreign income.  The MAGI limits are different depending upon the purchase date of the home.

• For homes purchased before November 7, 2009 - The phase-out range is $150,000 to $170,000 for married taxpayers filing a joint return.  For other taxpayers, the phase-out range is $75,000 to $95,000.  This means that the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

• For homes purchased after November 6, 2009 - The phase-out range is $225,000 to $245,000 for married taxpayers filing a joint return.  For other taxpayers, the phase-out range is $125,000 to $145,000.  This means that the full credit is available for married couples filing a joint return whose MAGI is $225,000 or less and for other taxpayers whose MAGI is $125,000 or less.

Who Cannot Take the Credit – In addition to the other qualifications and limitations discussed above, a taxpayer cannot take the credit if the following apply:

• Home is purchased from a close relative. This includes a spouse, parent, grandparent, child or grandchild.

• Home is no longer used as the main home.

• Home is sold before the end of the year in which it was purchased.

• If taxpayer is under the age of 18 (if married, both under the age of 18) on the date of purchase and the home is purchased after November 6, 2009.

• If the taxpayer can be claimed as a dependent of another.

• Taxpayer is a nonresident alien.

How and When the 2008 Credit Must Be Repaid - The 2008 credit is similar to a 15-year, interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed.  The repayment amount is included as an additional tax on the taxpayer's income tax return for that year.  For example, if a $7,500 first-time homebuyer credit is properly claimed on the 2008 return, the taxpayer will begin paying it back on his or her 2010 tax return.  Normally, $500 will be due each year from 2010 to 2024.

A taxpayer may need to adjust his or her withholding or make quarterly estimated tax payments to ensure that they are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• Taxpayer’s Death - If a taxpayer dies, any remaining annual installments are not due.  If a joint return was filed and the taxpayer passes away, the surviving spouse would be required to repay his or her half of the remaining repayment amount.

• Ceases Being Main Home - If a taxpayer stops using a home as the main home, all remaining annual installments become due on the return for the year that happens.  This includes situations where the main home becomes a vacation home or is converted to business or rental property.  There are special rules for involuntary conversions. 

• Home Sold - If a home is sold, 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.  For example, a home is purchased for $200,000 and the credit of $7,500 is claimed.  Assume that no improvements are made on the home and it is sold for $195,000 after repaying $500 of the credit.  The gain or loss would be measured for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment).  In this case, there would be a gain of $2,000 on the sale ($195,000 - $193,000).   Thus, the taxpayer would only be liable for repaying $2,000 of the credit when the home is sold.  Had the home sold for $193,000 or less, there would be no repayment required.

• Divorce - If a home is transferred to a spouse or to a former spouse (as part of a divorce settlement), that person is responsible for making all subsequent installment payments.

• Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply.  However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence.

If you already purchased a home, or are a qualified U.S. Service member who is contemplating purchasing a home, and wonder if you qualify for this credit, please give this office a call so we can review your situation.