IRS has posted a number of questions and answers (Q&As) on the first-time homebuyer credit on its web site. They are grouped into four categories: basic information; homes purchased in 2008; homes purchased in 2009; and scenarios. Those Q&As that shed some new light on the first-time homebuyer credit are examined below.
Background The homebuyer credit was recently enhanced by the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5). The pre-ARRA rules for the homebuyer credit apply for homes bought after Apr. 8, 2008 and on or before Dec. 31, 2008. The credit for these 2008 home purchases is reflected on an individual’s 2008 return. A credit for a home bought after Dec. 31, 2008 and before Dec. 1, 2009 would normally be reflected on an individual’s 2009 return but, at a taxpayer’s election, may be taken on his 2008 return.
Pre-ARRA credit. Under pre-ARRA law, for qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers could claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately).
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 3-year period before the purchase of the home to which the credit applies.
Eligible first-time homebuyers who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, could elect to treat the purchase as made on Dec. 31, 2008. For eligible purchases in 2009, a taxpayer could elect to claim the credit for 2008 or 2009 by attaching Form 5405 to the taxpayer’s original or amended 2008 tax return or 2009 tax return.
The first-time homebuyer credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase.
The credit for new homebuyers available under per-ARRA law is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6 2/3% of the amount of the credit. This repayment obligation may be accelerated or forgiven under certain exceptions.
ARRA enhancements to the credit. For residences purchased after 2008, Sec. 1006 of the ARRA:
- increases the maximum homebuyer credit to $8,000. (Code Sec. 36(b))
- extends the credit so that it applies to purchases before Dec. 1, 2009. (Code Sec. 36(h))
- correspondingly, for purposes of the election to treat the purchase of a principal residence as having been made on Dec. 31, 2008, extends the last date of purchase until Nov. 30, 2009. (Code Sec. 36(g))
- generally waives recapture of the credit for qualifying home purchases. However, if the taxpayer disposes of the home or it otherwise ceases to be his principal residence within 36 months from the date of purchase, the pre-ARRA rules for recapture of the credit apply. (Code Sec. 36(f)(4)(D))
Basic Information Homes qualifying for the credit. Any home purchased as the taxpayer’s principal residence and located in the U.S. The taxpayer must buy the home after Apr. 8, 2008, and before Dec. 1, 2009, to qualify for the credit. For a home that the taxpayer constructs, the purchase date is considered to be the first date he occupies the home. Vacation homes and rental property do not qualify for this credit, nor do homes located in U.S. territories.
Impact of room rental on credit. The credit would not be denied merely because the taxpayer plans to rent out two bedrooms in the home and report the rental income on Schedule E.
Impact of foreign ownership on credit. A taxpayer who owned a principal residence outside of the U.S. within the last three years is not disqualified from taking the credit for a purchase within the U.S.
Credit not mandatory. Homebuyers are not required to claim the credit.
Observation: The IRS guidance provides no information as to why someone would decline the credit. It’s hard to imagine why someone would decline the credit for a purchase in 2009, when the credit generally does not have to be paid back. For 2008 purchases, it’s a little different in that the credit is essentially an interest free loan. For either a 2008 or 2009 purchase, someone who plans to sell the new home within 3 years may want to decline it to avoid the hassle of claiming it and then having it recaptured. But, generally speaking, taxpayers normally would not decline the credit.
Taxpayers who can’t take the credit. A taxpayer falling into any of the following categories cannot claim the credit even if he buys a new home:
- The taxpayer’s income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
- The taxpayer buys his home from a close relative. This includes his spouse, parent, grandparent, child or grandchild.
- The taxpayer does not use the home as his principal residence.
- The taxpayer sells his home before the end of the year.
- The taxpayer is a nonresident alien.
- The taxpayer is, or was, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
- The taxpayer’s home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
- The taxpayer owned a principal residence at any time during the three years prior to the date of purchase of the new home. For example, if an individual bought a home on July 1, 2008, he cannot take the credit for that home if he owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.
Homes Purchased in 2008 How the credit is repaid. The credit will be recaptured on Form 1040 as additional tax and is repaid in 15 equal annual installments beginning in the second tax year after the year in which the credit is claimed.
When credit is paid back. For homes purchased in 2008, the credit is similar to a 15-year interest-free loan. The taxpayer must begin repaying the loan the second year after claiming the credit. It is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. For example, if a taxpayer properly claims the maximum available credit of $7,500 on his 2008 federal tax return, he must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his 2010 federal tax return. Normally, $500 will be due each year from 2010 to 2024.
IRS knowledge of sale. IRS will know if someone sells his residence before the 15 years are up through both self reporting and third-party information.
Homes Purchased in 2009 Claiming higher credit for an early purchase. A taxpayer who bought his home in 2009 (early) and filed his 2008 tax return claiming the $7,500 first-time homebuyer credit that has to be repaid can claim the $8,000 credit that doesn’t have to be repaid by filing an amended return.
No advance claim for the credit. A taxpayer who is in the process of buying a home and expects to close the deal before Dec. 1, 2009 may not claim the credit in anticipation of a purchase that has yet to happen. Until the taxpayer has finalized the purchase, which for most purchasers occurs at the time of the closing, he does not qualify for the credit.
Observation: A taxpayer whose 2009 qualifying home purchase will be completed after the Apr. 15, 2009 due date for filing the 2008 return should considering getting an automatic six-month filing extension if he would otherwise have to pay tax by the Apr. 15 due date and he is virtually certain to complete the purchase within the extended due date. The credit will be available to offset the tax he otherwise would have had to pay by the regular due date. If the credit won’t be sufficient to completely offset the tax, he will have to pay the shortfall with his extension request. This approach should not be undertaken if the home purchase could fall through.
Paying credit back. Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009. The obligation to repay the credit on a home purchased in 2009 arises only if the home ceases to be the taxpayer’s principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being the taxpayer’s principal residence.
Scenarios Impact of later marriage. Eligibility for the credit is determined on the date of purchase. If Taxpayer A, a first-time homebuyer, buys a house and then later that year marries Taxpayer B, not a first-time homebuyer, the credit is allowable to Taxpayer A.
Cosigner on mortgage. Taxpayer A is a single first-time home buyer. Taxpayer B (parent) cosigns for A and does not qualify. Both names are on the mortgage. Taxpayer B is not a first-time homebuyer and cannot claim any portion of the credit, but A may claim the entire credit ($7,500 for purchase in 2008; $8,000 for purchase in 2009), if the home was purchased as Taxpayer A’s primary residence.
Former residence rented out. A taxpayer owned her principal residence. Several years ago, she decided to relocate to a rented apartment, but did not sell the former residence. Instead, she rented it out to tenants. Now the taxpayer plans to buy another house and make it her new principal residence. She qualifies for the credit. A taxpayer who owned rental property within the past three years is still eligible for the credit. The taxpayer cannot have owned and used a home as his or her principal residence within the last three years.
Observation: This is a very pro-taxpayer interpretation. It may help taxpayers to qualify for the credit, where due to the tough real estate market in many locations in the past few years, they could not sell and rented out their residence after moving to a rental in a new location. The opportunity of a potential purchaser to qualify for the credit, coupled with today’s low interest rates, may help spur a sale of their former residence and put them in a position to qualify for a credit if they should decide to purchase a home in their new location.
One spouse owns. A husband and wife wanted to sell the home that the wife owned when they got married. The husband had not owned a home. He cannot qualify as a first-time homebuyer. The purchase date determines whether a taxpayer is a first-time homebuyer. Since the wife had an ownership interest in a principal residence within the prior three years, neither taxpayer may take the first-time homebuyer credit. Code Sec. 36(c)(1) requires that the taxpayer and the taxpayer’s spouse not have an ownership interest in a principal residence within the prior three years from the date of purchase. The husband may not take the credit even if he filed on a separate return.
Link to IRS website: https://www.irs.gov/newsroom/article/0,,id=187935,00.html