Under the Housing and Economic Recovery Act enacted in July 2008, a first-time homebuyer of a principal residence may claim a tax credit of 10 percent of the purchase price, up to $7,500. The IRS recently issued guidance on how purchasers who don’t file joint tax returns can allocate the credit.
A "first-time homebuyer" is an individual or married couple that has not owned a principal residence during the three years preceding purchase. "Purchase" is defined as any acquisition, except if the taxpayer acquired the property from close relative or the taxpayer’s basis in the property is determined by reference to the preceding owner’s adjusted basis. This means you can’t claim the credit for inherited property or if you are given an interest in the residence.
The law says the credit is good only on homes in the United States purchased between April 9, 2008 and July 1, 2009. If you are building a primary residence, the purchase date is the first day you occupy it. If you buy the home in 2009, you may choose to take the credit on either your 2008 or 2009 tax return.
The maximum credit per purchase is $7,500, and it begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000 ($150,000 for married filing jointly). 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.
The IRS said January 15 that unmarried individuals buying a principal residence may allocate the credit among themselves in any reasonable manner as long as the total credit does not exceed $7,500 or 10 percent of the purchase price, whichever is less. This means, for example, that if one purchaser has modified gross income above the phase-out amount and would not be able to claim his/her share of the credit, the entire credit can be allocated to the other purchaser(s).
Also, the IRS said you cannot take the credit if you:
- stop using the home as your main residence or sell it before the end of the year,
- are a nonresident alien,
- are eligible to claim the District of Columbia first-time homebuyer credit for any taxable year, or
- finance the purchase through tax-exempt mortgage revenue bonds.
Refundable and Repayable
The IRS noted that the credit is fully refundable, meaning that individuals who don’t earn enough money to have taxes withheld from their wages still are eligible for it. To have the credit refunded, they will need to file income tax returns for the year in which they want to claim the credit (either 2008 or 2009).
The "repayable" feature makes the first-time homebuyer credit operate more like an interest-free loan than an actual tax credit. Repayments start in the second year after the credit is claimed, by reporting 1/15th of the credit amount as additional taxes due in each year of the pay-back period. The IRS noted on its website that this may affect quarterly estimated taxes, so taxpayers should plan accordingly.
In addition, the IRS noted the following exceptions to the repayment rule:
- If a taxpayer receiving the credit dies before it is paid back, any remaining annual installments are not due. For taxpayers who claim the credit on a joint return, the surviving spouse would be required to repay only his/her half of the remaining amount.
- If you stop using the home as your principal residence, 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. However, there are special rules for involuntary conversions, and the IRS urged taxpayers affected by involuntary conversions to consult a tax professional about the tax consequences.
- If you sell your home, the remainder of the credit is due on the return for the year of sale. However, if you sell to an unrelated person, the repayment is limited to the amount of gain on the sale. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or eliminated.
- If you transfer your home to your spouse, or to your former spouse in a divorce settlement, that person is responsible for making all subsequent installment payments.
