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Tuesday Tax Tips •
1/26/10 |
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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.Michael T. McCormick, JD, LL.M.
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