The Housing Assistance Tax Act of 2008 enacted new Code Section 36 provides a tax credit for first-time homebuyers.
If your client is a first time homebuyer, they could be entitled to a refundable tax credit of up to 10% of the purchase price. This is obtained by the client filing Form 5405,“First-Time Homebuyer Credit”, with their federal income tax return.
To qualify as a first-time homebuyer the client (and if married, the spouse) must not have had a present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence.
Pointer: Watch the closing date for the new home if your client was previously a homeowner. It might pay to lease the home your client wants to purchase with an option to buy it, then buy it after the three years.
The maximum credit is $7,500 ($3,750 if married filing separate income tax returns) for 2008 and $8,000 ($4,000 if married filing separate income tax returns) for 2009. If your client purchases a qualified home before December 1, 2009, they can claim the credit in 2009, or elect to treat the purchase as if made on December 31, 2008, obtaining a quicker tax benefit. IRC Sec. 36(g).
If a non-married couple purchase a principal residence, the $7,500 maximum credit will be allocated among the couple based on rules the Treasury Department will provide. Note: This is a rare time the tax laws actually address non-married couples, but it is a negative result (i.e., but for this provision non-married couples might each claim the full $7,500 credit).
The amount of credit is limited based on your client’s income (technically, “modified adjusted gross income”, or MAGI). The credit is reduced for MAGI over $75,000 ($150,000 if married and filing a joint return). The credit allowed will be reduced by the amount which bears the same ratio to the amount, which is allowable as the excess (if any) of your client’s MAGI over $75,000 ($150,000 if married and file a joint income tax return), bears to $20,000. In simple terms, if your client’s MAGI exceeds $95,000 if single ($170,000 if married) your client won’t qualify for the credit.
The term “principal residence” has the same meaning as when used in Code Sec. 121.
Not every “purchase” qualifies for the credit. Your client cannot buy the house from a related person. If your client’s tax basis in the house is calculated with consideration to the adjusted basis of the house in the hands of the person from whom your client acquired it (e.g., your folks give you part of the house and sell you part so you can qualify for the credit), or under Code Sec. 1014(a) as a house your client acquired from a decedent, your client won’t qualify.
A residence, which your client constructed, will be treated as purchased on the date the client first occupies such residence for purposes of this credit.
Pointer: The date your client obtains a certificate of occupancy may be used to determine the date they occupied the house. Monitor the date your client applies for the certificate of occupancy, so that they can qualify if they previously owned a house.
Purchase price means the adjusted basis of the principal residence on the date such residence is purchased. Basically, this will be what your client purchased the house for.
Client’s won’t qualify for the credit in the following circumstances: 1) If the residence is financed by the proceeds of a qualified mortgage issue the interest on which is exempt from tax under Code Sec. 103;2) The client is a nonresident alien; or 3)If your client sells the house, or stops using it as a residence, before the end of the tax year.
This tax credit is more of an interest free loan than a pure tax benefit, because your client is required to surrender the benefit through a recapture of the credit. This will occur during the 15 tax years beginning with the second tax year following the year in which your client purchased the principal residence (the recapture period). Your client’s income tax will be increased by 6 2/3rds percent of the credit for each tax year in the 15-year recapture period. If your client holds their home for 15 years, the tax benefit is deemed fully earned.
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