First-Time Homebuyers May Be Eligible for a Special Tax Credit on Their Purchase
Financial Services Task Force Update 08/03/09 Mary N. Fertl, Kelly L. Turenne
The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers. This credit was expanded by the American Recovery and Reinvestment Act of 2009. The credit is 10% of the purchase price of the home, with a maximum available credit of $8,000 for homes purchased in 2009. The credit reduces the taxpayer's income tax liability or increases his or her refund, dollar for dollar.
The credit applies to first-time homebuyers who purchase a principal residence located in the United States. The purchase must take place after April 8, 2008 and before Dec. 1, 2009. Section 36(c)(1) requires that the taxpayer and the taxpayer's spouse not have an ownership interest in a principal residence within three years prior to the date of purchase. (A principal residence is the home one lives in most of the time.) Marriage imputes ownership of a previous home upon the other spouse. This means that, if one's spouse has owned a principal residence in the three years prior to the purchase of a home, neither the individual nor the spouse would be eligible for the tax credit.
Eligibility is determined as of the purchase date, which is generally interpreted to be the date of closing on the home. Accordingly, subsequent changes in circumstances, such as a marriage, would not affect one's eligibility for the tax credit on their home purchase. Thus, an individual who was eligible for the credit at the time he or she closed on their home would not lose their eligibility due to a later marriage to an ineligible party.
II. Income Limits
The credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on modified adjusted gross income (MAGI). A married couple would have the option of filing either a joint or separate tax return. If they file a joint return, the phase-out range is $150,000 to $170,000. If separate returns are filed, or if the purchaser is single, the phase-out range for the individual homebuyer is $75,000 to $95,000. Thus, the full credit is available for married couples who file a joint return with a MAGI of $150,000 or less and for married or single homebuyers who file an individual return with a MAGI of $75,000 or less.
III. Receiving the Credit
To claim the credit, the taxpayer must complete a Form 5405. First-time homebuyers who purchase a home in 2009 can claim the credit on either their 2008 tax return or on their 2009 tax return. The credit may not be claimed before the closing date; however, if the closing occurs after April 15, 2009, a taxpayer can still claim it on their 2008 tax return by filing an amended return.
Ultimately, the two filing options to consider are:
1. Amend the 2008 tax return. Taxpayers who have already filed their 2008 tax return may file an amended tax return. The amended tax return will allow them to claim the homebuyer credit and receive an immediate refund without waiting until next year to claim it on their 2009 return.
2. Claim the credit in 2009 rather than 2008. Taxpayers may also wait and claim the homebuyer credit next year, when they file the 2009 tax return, rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return, such as taxpayers who have less income in 2009 than in 2008.
To retain the credit, the home must remain the taxpayer's principal residence for 36 months. If, within 36 months of the date of purchase, the property is no longer used as the taxpayer's principal residence, the taxpayer is required to repay the credit. Repayment of the full amount of the credit is due at the time the income tax return is due for the year the home ceased to be the taxpayer's principal residence.
IV. Allocation of the Credit between Unmarried Taxpayers
For purposes of § 36(b)(1)(C), if two or more taxpayers who are not married purchase a principal residence and otherwise satisfy the requirements of § 36, the first-time homebuyer credit may be allocated between the taxpayers, using any reasonable method. A reasonable method is any method that does not allocate any portion of the credit to a taxpayer not eligible to claim that portion. A reasonable method includes allocating the credit between taxpayers who are eligible to claim the credit based on (1) the taxpayers' contributions toward the purchase price of a residence as tenants in common or joint tenants, or (2) the taxpayers' ownership interests in a residence as tenants in common. An ineligible purchaser cannot claim any portion of the credit.
Notably, if two unmarried taxpayers purchase a principal residence, and one taxpayer is not eligible for the credit, his or her ineligibility does not prevent the other homebuyer from claiming the entire credit. For example, Taxpayer A and Taxpayer B, unmarried individuals, purchase a principal residence, and each own a one-half interest in the residence as tenants in common. If Taxpayer B is not a first-time homebuyer within the meaning of § 36(c)(1), no portion of the credit may be allocated to Taxpayer B. However, Taxpayer A may claim the entire allowable credit. Similarly, if one of the unmarried purchasers is ineligible for the credit due to his or her income level, the entire credit could be allocated to the other unmarried purchaser.
Eligibility for the first-time homebuyer tax credit is determined at the time of the purchase of the home. A single taxpayer who is eligible for the homebuyer tax credit at the time of closing on the purchase of their home will not lose their eligibility by subsequently marrying an individual who would not have been eligible for the credit. An IRS representative has confirmed that a subsequent change in the title of the property would not affect the homebuyer's eligibility for the credit, so long as the property remains the homebuyer's principal residence for 36 months from the time of purchase.
If two unmarried people purchase a home together, the credit may be allocated between the taxpayers using any reasonable method. Further, if one unmarried purchaser does not meet the eligibility requirements of § 36(c)(1), the other unmarried purchaser may still claim the entire credit.
Finally, taxpayers who are eligible for the homebuyer credit in 2009 may claim their credit on their 2008 taxes by amending their 2008 tax return. This method of collecting the credit would likely be the most desirable because it would allow the taxpayer to receive the credit more quickly without having to wait until next year to claim it on their 2009 return. Additionally, the taxpayer may qualify for a higher credit if he or she had less income in 2008 than in 2009, and the credit would not be affected by the income of a spouse who did not exist in 2008.
For more details, of if you have any questions, please contact Mary Fertl at 414-277-5667 / [email protected], Kelly Turenne at 414-277-5577 / [email protected] or your local Quarles & Brady attorney.