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06/02/09: Marriage And Miscellaneous Issues About The First Time Home Buyer Credit

Housing Counsel

By Benny L. Kass

Q: I recently read that if my spouse or I did not own a home during the 3 years before settlement, we are entitled to claim a credit of up to $8,000. I alone own a condo; my husband has never owned a home before. We just signed a contract to purchase a new home and settlement will take place within the next few weeks. Are we eligible for this credit?

A: Unfortunately, the quick answer is no. The new law (and the IRS) have made it very clear that to qualify for the tax credit, neither the taxpayer or his/her spouse can have any ownership interest in a principal residence within the past three years from the date of purchase.

Let’s quickly review the new law, because it makes a difference if you bought your house in 2008 or this year. For purchases in 2008, eligible first time homebuyers were entitled to a tax credit of up to $7,500. However, there was a catch to this: the “credit” had to be repaid in 15 equal installments beginning in 2010.

Congress recognized that this was not a real incentive to stimulate home buying, so for homes purchased this year – but not later than November 30 – the credit was increased to $8,000. More importantly, unless you sell the house (or it is no longer your principal residence) within 3 years from the purchase date, there is no obligation to repay the credit.

There are a number of legal and factual questions involved in determining whether you are able to claim the credit. First, there are income limitations. If you are single (or file a separate income tax return), so long as your income does not exceed $75,000, you qualify. This is raised to $150,000 for married couples who file a joint tax return. Note that the credit is phased out for singles with income up to $95,000, and for married folks up to $170,000.

Second, when can you claim the credit? If you bought in 2008, you must file IRS Form 5405 with your income tax return. Although the initial deadline of April 15 th has passed, many taxpayers opted for the automatic extension, which runs through October 15 th of this year. If you have already filed, you have the right to file an amended return, but confirm this with your own tax advisor.

If you bought the principal residence after December 31, 2008, and if you qualify as a first-time homebuyer, you have a choice: you can either claim the credit on your 2008 tax return (or file an amended return if you have already filed), or claim the credit when you file your 2009 return. You should consult a tax professional to determine which route is best for you.

The thorny questions go to your own individual situations. The reader who posed the question would not be eligible, but what if only her husband bought the house in his name only? While the IRS has not yet addressed this issue, I believe that a good case can be made that he would qualify. He would, however, have to file a separate tax return. At a later date, he could add his wife to the title.

What if you own a rental property? According to the IRS, since that property is not used as a principal residence, you are still eligible for the credit. The law deals only with your main (principal) home, the one in which you live. You cannot have owned and lived in a house for three years prior to purchasing a new home, in order to take advantage of this credit.

A single person who qualifies for the credit will not lose it if subsequent to purchase, he or she marries. The IRS has made it very clear that the trigger date is the date that you take title to the house; what you do with the house later does not impact the tax credit, unless of course you sell it or move out within 3 years of purchase.

You owe money to the IRS. In a recent Private Letter Ruling, the Service made it clear that “the First Time Homebuyer credit … is subject to the same offsets for debt, either tax or other federal debt, as any other refund that a taxpayer would receive.” In other words, the credit will be “credited” against your IRS debt.

Here in the Washington area, there are many taxpayers who own property outside of the United States. Ironically, even if you currently call that home your principal residence, the way the law is written, if you now decide to buy a home in this country, so long as you qualify, you are allowed to take the credit.

But once again, there’s a catch. If you bought your home last year in the District of Columbia, you meet the income restrictions ($70,000 for single taxpayers or $110,000 for joint filers), and have not owned a principal residence in the District for at least one year, you are eligible only for a $5,000 tax credit. Unlike the $7,500 credit, this does not have to be repaid.

If you bought a house here in DC this year (or plan to purchase before December 1), you may have the option to take either the $5000 or the $8,000 credit. But if you cannot qualify as a first time homebuyer under the Federal credit because you owned a home here less than three years ago, you still may be able to qualify for the DC credit.

One new and important development: HUD recently announced they are working on a plan to allow potential homebuyers to use the tax credit toward their down payment on loans backed by the Federal Housing Administration (FHA). HUD Secretary Shaun Donovan, in a recent speech to the National Association of Realtors calls this the “monetization” of the first-time home buyer tax credit.

Interest rates remain low, as are home prices. Now is the time to consider buying that first home.

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