Articles

President Obama recently signed into law a bill that extends and modifies the first-time homebuyer tax credit. The bill extends the first-time homebuyer tax credit that was included in the ARRA through April 30, 2010, and modifies it to apply to certain current homeowners who buy a new primary residence. The credit was originally slated to expire for purchases after November 30, 2009.

As enacted in the ARRA, a refundable homebuyer tax credit equal to the lesser of $8,000 or 10 percent of a home’s purchase price is available to individuals buying a principal residence for the first time. The credit phased out for individuals with modified adjusted gross income (AGI) during the year of purchase between $75,000 and $95,000, and for joint filers with modified AGI between $150,000 and $170,000.

The new bill raises the modified AGI phase-out range to between $125,000 and S145,000 for individuals, and between $225,000 and S245,000 for joint filers.

For homes purchased after December 31, 2008, individuals must repay the credit only if they dispose of or move from their principal residence within 36 months of purchase. Individuals who purchased homes on or before that date must recapture the credit ratably over 15 years (with no interest charge), beginning in the second taxable year after the taxable year in which the home is purchased.

The bill provides that a taxpayer can continue to elect to treat the purchase of a principal residence purchased after December 31, 2008, and before May 1, 2010, as occurring on December 31 of the prior calendar year. Before this change, the election applied only to homes purchased after December 31, 2008, and before December 1, 2009. This election allows the taxpayer to accelerate claiming the credit to a preceding year tax return.

The bill also makes the credit available to any individual who purchases a home before July 1, 2010, provided that a written binding contract is in place before May 1, 2010.

Significant opportunity for long-term residents — The measure provides a significant opportunity for certain individuals who are selling one primary residence and buying another. In the past, these individuals could not qualify for the first-time homebuyer credit. But under the bill, certain long-term resident homebuyers who purchase a new principal residence may be eligible for a credit of up to $6,500. To qualify, an individual must have used the same principal residence for five consecutive years during the eight-year period ending on the closing date for the purchase of a new principal residence.

For example, a married couple uses their principal residence for 10 years ending on January 31, 2010, the closing date for purchasing a new home. The purchase price of the new home is $500,000 and the couple’s modified AGI for the year of purchase is $100,000. In this case, the couple would qualify for a refundable credit of $6,500, whereas under prior law the couple would receive no credit.

The same modified AGI limitations that apply to the first-time homebuyer credit apply here, as well, so homeowners with significantly higher incomes would not qualify for this credit.

Military personnel — Finally, the bill provides two carve-outs for military personnel. First, service members who are forced to either sell or cease using their home after December 31, 2008, and within 36 months of purchase, as a result of official extended-duty service would be exempt from having to repay the tax credit. In the case of a home acquired prior to January 1, 2009, which would be subject to the 15-year recapture, repayment of the credit would cease to apply in the taxable year the disposition or cessation occurs or any subsequent taxable year. Second, military personnel serving outside the United States for at least 90 days during the period beginning after December 31, 2008, and ending before May 1, 2010, would be given one additional year to qualify for the credit (i.e., the credit is extended through April 30, 2011).

Errors associated with credit — The bill also makes several changes to expand the definition of mathematical or clerical errors for purposes of administration of the credit by the Internal Revenue Service. For example, in some cases, the IRS can assess additional tax without the issuance of a notice of deficiency that would be typically required. This change applies to returns for taxable years ending on or after April 9, 2008.

Other enhancements made to assist in administration of the credit provide that:

• No credit is allowed unless the buyer (or spouse of buyer) is age 18 or older on the date of purchase;
• The buyer must attach a copy of the settlement statement to the tax return for the year of purchase;
• The definition of purchase excludes property acquired from a person related to the buyer (or buyer’s spouse); and
• No credit is allowed to any taxpayer if the taxpayer is a dependent of another taxpayer.

This article is not intended to render any legal, accounting or other professional advice on specific facts or matters. Please consult with your Smith & Howard tax professional before taking any action.