Tax Relief Blog

Newly revised 2008 Form 5405, First-Time Homebuyer Credit, reflects Recovery Act IR 2009-14 Mike Habib, EA Tax Relief & Tax Problem Resolution In a news release issued on Feb. 25, 2009, IRS has announced that it has posted a revised version of the 2008 Form 5405, First-Time Homebuyer Credit, to reflect recent improvements to the credit made the American Recovery and Reinvestment Act of 2009 (Recovery Act, P.L. 111-5). Pre-Recovery Act credit. Under pre-Recovery Act law, for qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may 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, may elect to treat the purchase as made on Dec. 31, 2008. For eligible purchases in 2009, a taxpayer may 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 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 6⅔% of the amount of the credit. This repayment obligation may be accelerated or forgiven under certain exceptions.

Observation: In other words, the credit for new homebuyers is the equivalent of a long-term interest-free loan from the government.

Recovery Act enhancements to the credit. For residences purchased after 2008, Sec. 1006 of the Recovery Act:

• 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 has until Nov. 30, 2009. (Code Sec. 36(g))
• generally waives the recapture of the credit for qualifying home purchases after Dec. 31, 2008. However, if the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, the pre-Recovery Act rules for recapture of the credit apply. (Code Sec. 36(f)(4)(D))

Observation: Committee reports indicate that this waiver of the recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on Dec. 31, 2008, which is allowed by Code Sec. 36(g).

Form 5405. Form 5405 is fairly straightforward. Part I A calls for the address of the home qualifying for the credit while Part I B asks for the date it was acquired. A box must be checked on Part I C if the taxpayer is choosing to claim the credit for a home bought in 2009.

Observation: Specifically, Part I C calls for the box to be checked “[i]f you are choosing to claim the credit on your 2008 return for a main home bought after December 31, 2008 and December 1, 2009.” Thus, Form 5405 reflects the Recovery Act change making this option available for a main home bought Dec. 31, 2008 and before Dec. 1, 2009.