03/24/09: First Time Homeowner Benefits: A Quagmire – But Potentially Beneficial
By Benny L. Kass
Did you buy a home last year or are you planning to buy now that interest rates are very low? Are you a first time homebuyer? Did you buy in the District of Columbia?
These are just a few questions you have to ask in order to take advantage of the various First Time Homebuyer’s programs enacted by Congress.
Congress and the President believe that one way to solve the current financial crisis is to stimulate home buying. As a result, Congress has now enacted three different laws to encourage renters to become part of the great American dream of homeownership.
To assist you in understanding the various approaches, here is a summary:
You bought in 2008: if you went to settlement on a home between April 9 and December 31,2008 – and if the home was not in the District of Columbia – you are eligible for a credit of up to $7,500. To be a first-time homebuyer under this approach, you cannot have owned a principal residence anywhere within a three-year period before taking title to the new one.
Single taxpayers with incomes up to $75,00 (or married couples up to $150,000) are able to qualify for the full tax credit. It is phased out when your income reaches $95,000 for singles (or $170,000 for married folks.)
This is not a credit, however; it is an interest-free loan from the government. Two years after settlement, you have to start paying the money back in installments over a 15 year period. The payment is included in your annual income tax returns. If you sell the home before the 15 years are up, in most situations you will have to pay back the balance of the “loan”. However, if you sell the home to an unrelated third party, the loan repayment (called “recapture in tax language) is limited to the amount of gain on the sale.
In order to take advantage of this “credit-loan”, when you file your income tax for 2008, you will need to include Form 5405. This is available from the IRS (www.IRS.gov/publications and forms).
– You bought (or plan to buy) in 2009: President Obama, on February 17, 2009, signed into law the American Recovery and Reinvestment Act of 2009. One important aspect of this was to increase the credit to $8,000, and eliminate the recapture requirement.
If you purchase a home between January 1 through December 1, 2009 – and you and your spouse did not own a home during the 3-year period prior to settlement – depending on your income you can claim a credit of up to $8,000. The same income limitations described above apply here.
You do not have to pay the IRS anything if – and only if – the home continues to be your principal residence for a period of three years.
If you buy this year in the District of Columbia, you have a choice of taking the $8,000 credit or the $5,000 credit described below. Obviously, $8,000 sounds like a better deal, but as will be explained below, you may not be eligible for the larger credit.
If you haven’t yet filed your income tax return for 2008, you have the right to elect to claim the credit for last year, even if you buy in 2009. Look at your income and your financial situation. Are you better off claiming the credit for last year or when you file your 2009 tax return. If you need assistance, talk with your tax advisors. If 2008 is better for you, and if you plan to buy this year, you should consider applying for the automatic extension. This will give you until October 15 th in which to buy that home, yet at the same time claiming the credit on last year’s tax return. The automatic extension gives you until that October 15 th date. If you buy the home thereafter, you can only file for the credit when you file your 2009 return.
To file for the credit, once again you will need to include form 5405 with your tax return. If you have already filed, the IRS suggests that you have several alternatives: amend your tax return, or claim the credit in 2009.
– Buying in the District of Columbia: if you bought that home last year here in the District, you may be eligible for a $5000 credit. To qualify, you cannot have owned another principal residence in the District for a one-year period prior to taking title. And the income limitations are different from the Federal: you cannot earn more than $70,000 for single taxpayers (or $110,000 if you are married. And the credit phases out when you earn more than $90,000 (or $130,000 married).
You must file form 8859 when you file your 2008 tax return.
What if you buy (or have already bought) after January 1, 2009? If you can qualify for the $8000 credit (as outlined above) you have the right to make that election and take the larger credit. But if you cannot qualify as a first time homebuyer under the federal credit because you owned a home in DC less than three years ago, you still may be able to qualify for the DC credit.
Yes, its confusing. Let’s assume that you owned a home here in DC and sold it in April of 2007. You now want to buy another principal residence this month. You do not qualify for the $8000 credit but (assuming you meet the income requirements) you should be able to qualify for the DC credit of up to $5000.
A credit is different from a deduction. According to Julian Block, a tax attorney in New York, “deductions merely reduce the amount of income on which taxes are figured. Credits are subtracted from the tax itself, resulting in dollar-for-dollar reductions of the tax that would otherwise be owed.” (Mr. Block is the author of a basic primer on Real Estate tax, entitled
the “Home Seller’s Guide To Tax Savings,” available through www.julianblocktaxexpert.com.
Congress has tried hard to encourage new home buying. The laws are complex, but the benefits are available and worth exploring.