UPDATE! Tax Credit to Aid First-Time Homebuyers

March 6th, 2009

To stimulate home sales, Congress established the first-time homebuyer credit in 2008 and then modified it for 2009, resulting in two significantly different sets of rules for each.  Besides increasing the credit to $8,000 for 2009 ($7,500 for 2008), the most significant change is that the credit in 2008 was actually an interest-free 15-year loan, while the credit in 2009 does not need to be paid back if certain requirements are met.

• Credit Amount: 10% of the purchase price with a maximum of $8,000 ($4,000 for those filing married separate)
• 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 December 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 or 2009 tax return.

• Credit Amount: 10% of the purchase price with a maximum 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 tax return.

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.

When to Claim the Credit – If an eligible purchase is made in 2008, the first-time homebuyer credit can be claimed on your 2008 tax return. For an eligible purchase in 2009, the credit can be claimed on either your 2008 (or amended 2008 return) or 2009 return.

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 purpose of the credit is to assist lower-income individuals in acquiring their own home. Thus, 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. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. 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.

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

• 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.

• Taxpayer is a nonresident alien.

• Taxpayer is, or was, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.

• Home financing comes from tax-exempt mortgage revenue bonds.

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, as part of a divorce settlement, to a former spouse, that person is responsible for making all subsequent installment payments.

• Involuntary Conversion – If the home is involuntarily converted (e.g., it’s 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.

It may be appropriate to consult with this office in advance of a home purchase where you or a family member are contemplating on utilizing this credit.

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