The Ins and Outs of the 2009 First-Time Home Buyer Credit

By Cody E. Pike, MST

The current buzz around the real estate market focuses on the “First-Time Home Buyer Credit” defined under Section 36 of the United States Internal Revenue Code. This credit allows a “first-time home buyer” to claim a credit on his or her tax return for the amount of $8,000 or 10% of the purchase price (whichever is less) for qualifying purchases made after December 31, 2008. A “first-time home buyer” is an individual (and if married, their spouse, since they are treated as one taxpayer) that has had no ownership interest in a principal residence during a 3-year period ending on the date of purchase of the new principal residence. This means that an individual or married couple who has rented, lived with a relative, or lived in a house where they did not have an ownership interest for the last three years will qualify for the credit. All purchases must close before December 1, 2009 because the credit will sunset on this date.

If a qualifying purchase was made on or before December 31, 2008, the home owner is entitled to a $7,500 credit or 10% of the purchase price (whichever is less). However, the credit is offset by a 15-year repayment provision. The repayment provision adds an additional $500 (or 6 2/3% of the credit amount if less than $7,500) of tax on his or her tax return starting in 2010 and ending in 2025. If the home owner sells the house within this 15-year repayment period, the remaining un-recaptured balance of the credit may need to be added to that year’s tax return. (See below for an exception to this recapture requirement.)

Here is some valuable additional information you should know:

You Don’t Have to Wait to Obtain Your Credit

Qualifying purchases made in 2009 (but before December 1, 2009) can be elected as being purchased as of December 31, 2008. This allows taxpayers to receive the credit now instead of waiting until filing next year’s tax return. The taxpayer’s 2008 tax return needs to be amended once the purchase has taken place to show the election to treat the purchase as being made on December 31, 2008. Once submitted to the IRS, the taxpayer should receive the amount of the credit within normal IRS processing time. The alternative is to wait and claim your credit on the 2009 tax return due April 15, 2010.

You Can Use the Tax Credit Towards Your Closing Costs

Just recently, FHA-approved lenders were given the okay to use a bridge loan so that taxpayers can use the First-Time Home Buyer Credit towards their closing costs or to add to the minimum down payment. This gives the first-time home buyer the opportunity to use the credit upfront. The taxpayers will still need to amend their 2008 tax return for the credit and upon receipt of the funds, they would then pay off the bridge loan. Note that the credit cannot be used towards the minimum down payment, but rather to add to the down payment.

A Land Contract May Qualify for the Credit

The tax law is silent about whether or not a land contract qualifies as a purchase for purposes of qualifying for the credit. However, the Michigan Association of REALTORS requested a legal opinion on whether a land contract qualifies for the first-time home buyer credit. The legal opinion supported the view that a land contract qualifies as an acquisition eligible for the credit based on Michigan law and court cases. [Contact the author of this article, Cody Pike, if  you would like a copy of this legal opinion.]

You Can Avoid the Repayment Provision for Purchases Before December 31, 2008

As mentioned previously, some taxpayers may be subject to the recapture provision of the First-Time Home Buyer Credit when they sell their home. The amount of the original credit less amounts repaid is added to the gain from the sale of the home. This gain is taxable unless certain provisions are met.

 Luckily, there’s a way to avoid the taxable gain, which includes the credit recapture.  This can be accomplished through selling the principal residence to an unrelated person after using the home as your principal residence for a 2-year period. There is a $250,000 gain exclusion ($500,000 if married) on the sale of your home if you owned and used the home as your principal residence for at least two out of the five years prior to the sale. Given these facts, there would be no gain recognized on the sale of your home as long as the gain did not exceed the exclusion amount. But, if you sell your home to a relative, use the home as your principal residence for less than two out of the last five years, or own the home for less than two years, then the gain will be taxable.

If you have any questions regarding the First-Time Home Buyer Credit or would like your 2008 tax return amended to claim the credit, contact Cody Pike at codyp@ehtc.com or 616-575-3482.