New Homebuyer Credit

As much as $7,500 toward home purchase

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Changes to this credit are included in the February 2009 economic stimulus package.

The massive housing law signed today by President Bush includes a new credit that works as an interest-free loan toward the purchase of a home by taxpayers who have not owned a home within the previous three years. The maximum credit is $7,500, but it is phased out for higher-income taxpayers. The credit can be claimed for purchases on or after April 9, 2008, so it's available right now.

Who's eligible

To claim this credit you must be a "first-time homebuyer," but this term includes previous homeowners provided they have not owned a home at any time in the three years ending on the date of purchase. If you're married, your spouse must meet this requirement as well. The credit isn't available to nonresident aliens.

Qualifying purchase

Your purchase will have to meet several requirements for you to claim the credit:

• You have to buy a home in the United States.
• You have to use the home as your principal residence.
• You must buy from an unrelated person.
• You can't be eligible for the existing credit allowed to first-time homebuyers in the District of Columbia in the year of purchase or in any prior year.
• Your purchase can't be financed by a mortgage provided with tax-free financing.
• The purchase has to occur on or after April 9, 2008 and on or before June 30, 2009. For this purpose, if you build a home you're treated as purchasing it on the first day you occupy it.
• You have to continue owning the home and using it as your principal residence through the end of the year for which the credit is claimed.

Size of credit

The credit is limited to 10% of the purchase price of the home. In addition, it's limited to $7,500 in the case of a single individual or married couple filing jointly, or $3,750 for a married individual filing separately.

The credit is phased out beginning when your income exceeds $150,000 if married filing jointly or $75,000 otherwise. (For this purpose, "income" means your adjusted gross income after adding back certain items that may be excluded when working outside the United States or in U.S. possessions.) The range for phasing out the credit is $20,000, so that for example you would get half the credit otherwise available if your income was $10,000 above these amounts. The credit is completely eliminated when your income reaches $170,000 if married filing jointly or $95,000 otherwise. This phase-out is only for the purpose of determining the amount of the credit in the year of purchase, so going over the income limit in subsequent years will have no effect, even during the "repayment" period described below.

Claiming the credit

You claim the credit on your income tax return for the year of the purchase. This is a "refundable" credit, which means you can receive the full credit even if it exceeds your total tax for the year.

Married taxpayers who claim the credit on a joint return are treated as each claiming half the credit. This could be important in the case of a later divorce or death of one of the spouses.

The law says the IRS can allow the credit to two unrelated purchasers provided that the total credit allowed on the purchase of a single home doesn't exceed $7,500. It isn't clear whether the IRS will require an equal split of the credit or perhaps allow the buyers to determine how it is divided between them.

A special rule allows people who buy a home in 2009 (by the June 30 deadline) to claim the credit on their 2008 income tax return. If you've already filed your 2008 return you can amend it to claim the credit. Making this choice lets you get the money sooner than if you claim the credit on your 2009 return, but also requires you to start repaying the "loan" a year earlier, as described next.

"Repaying" the "loan"

Although this is a tax credit, it operates more or less like an interest-free loan. Beginning with the second year after you claimed the credit, it is recaptured at the rate of 1/15th per year. For example, if you claimed the maximum credit of $7,500 on your 2008 tax return, beginning with your 2010 tax return you would owe an extra $500 per year for 15 years, on top of whatever other tax you owed for those years.

If you dispose of the home (sell it, give it away, etc.) or stop using it as your principal residence before the last year for this repayment, you have to repay the entire remaining amount with your tax return for that year, subject to certain special provisions.

One of these rules says your repayment obligation is limited to the amount of gain you have on the sale if you sell the home to an unrelated person. But "gain" is figured in a special way that includes any part of the credit that hasn't been repaid. For example, if you buy a home for $150,000 and end up selling it for $148,000 (net of expenses) at a time when you still have $4,500 of unrecaptured credit, it may appear that you have a $2,000 loss, but for purposes of this rule you're treated as having a gain of $2,500, because you have to subtract the unrecaptured credit from your purchase price before figuring gain or loss.

Another special rule says credit recapture doesn't apply after the death of the taxpayer. Any amount of the "loan" that remains unpaid at that time is forgiven. There's also a special rule for involuntary conversions (for example, the home is destroyed by fire), allowing you to avoid accelerated repayment and continue paying on the 15-year schedule if you buy a replacement home within two years.

Finally, accelerated recapture doesn't apply when a home is transferred to a spouse or ex-spouse in a divorce, but the remaining repayment obligation becomes the obligation of the spouse receiving the home.

Problems?

There's no special rule about recapture in the case of foreclosure, but most people don't have a gain as a result of a foreclosure sale, so in most cases recapture will not be a problem in this situation.

What if you take a new job in another city? The credit will be recaptured on your existing home whether you sell it or not, because it's no longer your principal residence. And you won't get a new credit when purchasing the replacement home (you've owned a home within the preceding three years, and anyway this provision expires 6/30/09), so this seems like a glitch in the law. You have a similar problem if you leave your home to live in a nursing home because there's no provision covering that contingency.

There's also no special rule for people who make a gift of their home, and this is a potential gotcha. Someone buying a home today and gifting it to a child ten years from now may not realize the gift will require them to come up with thousands of dollars extra on that year's tax return.