09/08/08: Exploring The New First Time Homebuyer Rules
By Benny L. Kass
The “First Time Homebuyer tax credit” which is part of the recently enacted Housing and Economic Recovery Act of 2008 needs to be fully explored, since it is both a benefit and a burden for potential homebuyers.
If you purchased a home on or after April 9, 2008 – and before July 1, 2009 – and if you (and your spouse or significant other) did not own a principal residence during a three year period prior to that purchase, you may be eligible for a tax credit of up-to- $7,500.00.
What's a tax credit? This means that your Federal Income Tax obligation is reduced for every dollar that you get by way of the credit. For example, if you received the full $7,500 this year, and you would owe $10,000 in income tax when you file your 2008 Income Tax Return, you would only have to send the IRS a check for $2,500 ($10,000 - $7,500).
This is significantly different from a tax deduction. In our example, if the $7,500 could only be used as a deduction, and if you are in a 20 percent tax bracket, you could only deduct $1500 (20% x $7,500), and would then have to send the IRS a check in the amount of $8,500.
The homebuyer tax credit is the lower of $7,500 or 10 percent of the purchase price. In most cases – unless you buy something for less than $75,000, you may be eligible for the full credit. It is to be noted that the home you purchase must be your principal residence, although this can include condominiums, cooperative housing, mobile homes and even a house boat.
According to the Joint Committee on Taxation, the “credit phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase.”
What is “modified adjusted gross income” (MAGI)? You have to discuss this with your tax advisors because it is a complicated concept. You take your adjusted gross income and add back a number of items, such as passive loss or passive income, taxable social security, student loan interest, or tuition and fee deductions.
The National Association of Home Builders – which has thrown its full support to this new law – has created a Web site which attempts to answer a number of questions relating to this first time home buyer law. Here is one example provided on this site:
Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Divide $10,000 by $20,000 yields .05.When you subtract .5 from 1.0, the result is .5. To determine the mount of the partial first -time home buyer tax credit that is available to this couple, multiply $7,500 by .05.The result is $3,750.
If you think this is confusing, wait; it ain't over yet. In reality, this is not a credit, but an interest-free loan. You have to pay this loan back in equal yearly installments over a period of 15 years. If you sell the house – or no longer use it as your principal residence -- the remaining balance of the repayment immediately becomes due, but the repayment cannot exceed the amount of any profit you have made from the sale.
The first repayment amount will begin in the second taxable year in which the house was purchased. Thus, if you take the credit on your 2008 tax return, you do not have to begin the repayment until you file your 2010 tax return. It is to be noted that if you purchase your first home in 2009 (before the July 1 st deadline) you have the right to elect to take the credit when you file your 2008 tax return. This election will be helpful for consumers who know what their MAGI will be this year, but are uncertain as to what it will be next year.
It is often said that only death and taxes are inevitable. In this case, however, if homeowner dies, there will be no recapture.
If the house is foreclosed upon, there will be no acceleration if a new principal residence is purchased within a two year period. And if there is a transfer to one spouse (or to a former spouse) incident to a divorce, the ex-spouse who gets the house will be legally obligated to pay the recaptured tax credit.
For many years, District of Columbia residents who were first time homebuyers were entitled to an up-to-$5,000 tax credit. However, this credit – which expired on December 31, 2007 – did not have to be repaid. According to the Joint Committee on Taxation “no credit is allowed if the D.C. homebuyer credit is allowable for the taxable year the residence is purchased or a prior taxable year.” This language is confusing. D.C. residents who took advantage of that credit (and have not owned a principal residence within the past three years prior to buying another house) should clarify their situation with their own tax professionals.
The clear intent of this law was to spur consumers into buying a house. But the repayment requirement can impact on the tax basis of your property, which can lead to a different amount of profit for State tax returns as compared to the Federal tax return.
Potential new home buyers must carefully review and understand all of the implications – tax and monetary– before opting to take the credit. This should not discourage you from buying now, if you find the right house. You have until next year before you need to make the election to take the credit.