10/21/08: District Homebuyers Get a Better Tax Break
By Benny L. Kass
The District of Columbia Homebuyer Tax Credit has been revived, and is alive and well. If you bought a home (condominium or cooperative) in the District after January 1, 2008, or plan to buy one by December 31, 2009, you may be eligible for a full $5,000 tax credit.
However, there is another tax credit available to consumers who purchased a home other than in DC on or after April 9, 2008 – and before July 1, 2009. Under this program, you may be eligible for a tax credit of up-to- $7,500.00. But this credit has strings attached to it; it ultimately has to be repaid.
What’s a tax credit? This means that your Federal Income Tax obligation is reduced for every dollar you get by way of the credit. For example, if you received the full $5,000 this year, and you would normally owe $10,000 in income tax when you file your Income Tax Return, you would only have to send the IRS a check for $5,000. ($10,000 – $5,000).
This is significantly different from a tax deduction. In our example, if the $5,000 could only be used as a deduction, and if you are in a 20 percent tax bracket, you could only deduct $1,000 (20% x $5,000), and would then have to send the IRS a check in the amount of $9.000.
You are eligible for the District tax credit so long as you have not owned a home in DC for one full year before you buy. The home must be your principal residence, and you cannot earn more than $110,000 per year if you file a joint tax return (or $70,000 if you are a single tax filer). The credit is phased out if your income is higher, and no credit will be available if you earn over $130,000 for joint filers, or $90,000 if you file on your own
You do not have to repay this DC credit. It was a Congressional effort, strongly endorsed by Congresswoman Eleanor Holmes Norton, to spur the District’s housing market and its economy.
The other homebuyer tax credit was included in the recently enacted Housing and Economic Recovery Act of 2008. In order to be eligible, you have to purchase your primary home between April 8, 2008 and July 1, 2009, and you have to be a “first time homebuyer”. This is defined as a person who has not owned a home in the three years prior to a purchase.
The “credit” is the lower of $7,500 or 10 percent of the purchase price. In most cases – unless you buy something for less than $75,000, you may be eligible for the full credit. According to the Joint Committee on Taxation, the “credit phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase.”
The National Association of Home Builders – which has thrown its full support to this new law – has created a Web site which attempts to answer a number of questions relating to this first time home buyer law. Here is one example provided on this site:
Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Divide $10,000 by $20,000 yields .05. When you subtract .5 from 1.0, the result is .5. To determine the mount of the partial first -time home buyer tax credit that is available to this couple, multiply $7,500 by .05. The result is $3,750.
If you think this is confusing, wait; it ain’t over yet. In reality, this is not a credit, but an interest-free loan. You have to pay this loan back in equal yearly installments over a period of 15 years. If you sell the house – or no longer use it as your principal residence — the remaining balance of the repayment immediately becomes due, but the repayment cannot exceed the amount of any profit you have made from the sale.,
The first repayment amount will begin in the second taxable year in which the house was purchased. Thus, if you take the credit on your 2008 tax return, you do not have to begin the repayment until you file your 2010 tax return. It is to be noted that if you purchase your first home in 2009 (before the July 1st deadline) you have the right to elect to take the credit when you file your 2008 tax return. This election will be helpful for consumers who know what their income will be this year, but are uncertain as to what it will be next year.
It is often said that only death and taxes are inevitable. In this case, however, if the homeowner dies, there will be no recapture. But, according to the IRS in a recent explanation of this new law, “if you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount”.
If the house is foreclosed upon, there will be no acceleration if a new principal residence is purchased within a two year period. And if there is a transfer to one spouse (or to a former spouse) incident to a divorce, the ex-spouse who gets the house will be legally obligated to pay the recaptured tax credit.
The IRS has prepared a list of those who are not eligible to take the credit. Included in this list: (1) you buy your home from a close relative, which includes your spouse, parent, grandparent, child or grandchild; (2) you are a nonresident alien; (3) your home financing comes from tax-exempt mortgage revenue bonds, and (4) you are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. The word “eligible” makes it clear that unless your income is over the District’s income threshold but below the Federal guidelines, you cannot pick and choose if you are buying in the District.
(See Internal Revenue Service IR-2008-106, available on line at www.irs.gov).
The clear intent of this law was to spur consumers into buying a house. But the repayment requirement can impact on the tax basis of your property, which can lead to a different amount of profit for State tax returns as compared to the Federal tax return.
Potential new home buyers outside of the District must carefully review and understand all of the implications – tax and monetary– before opting to take the credit. This should not discourage you from buying now, if you find the right house. You have until next year before you need to make the election. And if you plan to own and live in the District, discuss your options with your tax advisors.