A Home-Buyer Tax Credit Worthy of the Name

Should you give the $7,500 home-buyer tax credit a second look?

Now that Congress might be on the verge of transforming it into a true tax credit -- one that never has to be paid back -- you might want to do so.
On Jan. 15, the House Democratic leadership outlined its $825 billion economic stimulus package, loaded with $275 billion in tax cuts and $550 billion in new spending on health care, education, alternative energy and infrastructure improvements. Tucked away in the tax section was a significant improvement to last July's congressional effort to stimulate home sales. That program offered a credit of up to $7,500 to purchasers who had never bought a house or hadn't owned one during the previous three years. To qualify, taxpayers would need to close on a house between April 8, 2008, and this coming July 1. But relatively few people were attracted to the plan because unlike almost all other federal tax credits, this one had to be repaid in full over a 15-year period. In effect, the $7,500 was more like an interest-free installment loan from the government than a straightforward dollar-for-dollar reduction on buyers' tax bills. Although final details on a revised credit are still subject to negotiations between the House and Senate -- and to passage of the economic stimulus package itself -- there's a good chance that buyers who sought the credit in 2008, and new purchasers in 2009, will be relieved of the repayment requirement. According to industry projections, removing the repayment rule could lead to an additional 202,000 purchases this year.
The National Association of Realtors is pushing for the July 1 deadline to be extended to Dec. 31, opening the door to even more sales. Meanwhile, the IRS has come out with two recent advisories on the credit, plus a new Form 5405 for taxpayers interested in claiming the $7,500 benefit, either for 2008 or 2009. You can download a copy of the form at http://www.irs.gov in the publications and forms section.

Based on the latest IRS guidance, here's what you need to know if you're thinking about buying a house this year -- taking advantage not only of low prices and record low mortgage rates, but a temporary tax credit that might or might not eventually have to be repaid. * The $7,500 is available to singles, married couples filing jointly and unmarried co-purchasers, provided they meet the non-ownership test for the previous three years. Married couples filing separately can claim up to $3,750 each. Unmarried individuals can allocate the credit on their filings according to their respective ownership shares or capital investments in the house. * Only principal residences -- or in the IRS's words, "the one you live in most of the time" -- are eligible.

No second homes, investment properties or houses outside the United States pass the test. However, the definition of "home" extends far beyond conventional houses sited on lots. It "can be a . . . houseboat, housetrailer, cooperative apartment, condominium or other type of residence," according to Form 5405. For example, if you buy a sailboat or powerboat with full living facilities, tie it up at a marina, and make it your "main home," you should be eligible to claim the credit, though you might want to run all the specifics of your situation by your accountant or tax adviser. * Even if it's your first home purchase, you are not eligible if your adjusted gross income is above $95,000 (single filer) or $170,000 (married joint filers). Married couples with incomes between $150,000 and $170,000 are eligible for reduced credits, based on a phase-out schedule. Single filers with incomes between $75,000 and $95,000 also are subject to reduced credit limits. D.C. home buyers who are eligible for the city's first-time buyer credit are barred from use of the federal tax credit. Taxpayers who use tax-exempt mortgage bonds issued by state or local governments to finance home purchases also are ineligible. * You can't claim the $7,500 credit if you buy your house from a "related person," meaning a spouse, parents, grandparents, children or a corporation or partnership in which you own more than 50 percent of the stock or capital interests. If you pass all of these tests, and get the purchase done by whatever deadline Congress decides as part of the final stimulus package, you should be able to take $7,500 off your federal tax bottom line, and possibly not worry about ever paying it back.
By Kenneth R. Harney Saturday, January 24, 2009;