Isaacson Isaacson
Sheridan & Fountain, LLP
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 December 7, 2009
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Desmond Sheridan published an article in the November 2009 issue of Real Property, a publication of the North Carolina Bar Association's Real Property Section. The article is intended to aid real property lawyers in understanding and dealing with the recently revised Homebuyer Tax Credit. The article begins on page 10.  It is also reproduced below.
 
Here is the link to the publication: 
 
 
 
Here is the text of the article:
 
Homebuyer Tax Credit
Desmond G. Sheridan
 
Introduction.
 
            In an attempt to stimulate the U.S. housing market, Congress enacted, in April 2008, a refundable tax credit for "first time" homebuyers. Since initial passage, the credit has been changed, most recently on November 6, 2009. The credit was scheduled to expire on December 1, 2009, so the new law prevented the expiration and also greatly liberalized the availability of the credit. This article will attempt to trace the history of the credit and set out the rules for where the credit stands today. The history still matters, because different taxpayers may be treated differently depending on when they purchased a residence.
 
Initial Law.
 
          For qualifying purchases of principal residences in the U.S. after April 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). Because the credit is "refundable," a taxpayer does not need to owe $7,500 in tax to take full advantage of the credit. The credit is found in Section 36 of the Internal Revenue Code.
 
          A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. This means that some people who previously owned a home were eligible for the credit.

           Because only prior ownership in a principal residence is considered, it's possible for a taxpayer who already owns a vacation home to claim the new credit, if he otherwise qualifies. For example, a taxpayer whose principal residence for at least three years has been a rental apartment in the city, and who owns a beach home, could claim the credit for the purchase of a new principal residence if his income doesn't exceed the phaseout levels discussed below.
 
         Eligible first-time homebuyers who purchased a principal residence after December 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on December 31, 2008. This allowed taxpayers to buy a home in 2009, but take advantage of the credit for 2008.

         The credit phases out for individual taxpayers with modified "adjusted gross income" between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase.
 
         Under the initial law, the credit for new homebuyers was recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit was recaptured as an additional income tax amount equal to 6 2/3% of the amount of the credit. In other words, under initial law, the credit for new homebuyers was the equivalent of a long-term interest-free loan from the government.
 
          The initial law provided that if the taxpayer disposed of the residence within 36 months of purchase, the credit must be ratably recaptured.
 
Recovery Act Changes.
 
            The American Recovery and Reinstatement Act passed earlier in 2009 (the "Recovery Act") extended the credit to apply to purchases made before December 1, 2009. The Recovery Act provisions also waived the recapture of the credit for qualifying home purchases after December 31, 2008. This was a major change because it no longer required the taxpayer to "pay back" the credit as in the original law. Thus, the credit essentially became a direct subsidy of the purchase of a home. The Recovery Act also changed the maximum amount of the credit to $8,000.00. Note that the Recovery Act retained the same rules for a disposition of the home within 36 months from the date of purchase that are described above.
 
Worker, Home Ownership, and Business Assistance Act of 2009.
 
            The Worker, Home Ownership, and Business Assistance Act of 2009 (the "New Act") was signed into law on November 6, 2009. Most importantly, the New Act prevented the homeowner tax credit from expiring. Recent economic data had shown stabilization in the housing market and there were fears that the expiration of the credit could cause this stabilization to erode. Therefore, one of the government's motivations was to continue the subsidy of home purchases in order to keep the market, at the very least, where it is now. The New Act makes the following important changes to the law:
1.   The New Act extended the credit to apply to a principal residence purchased by the taxpayer before May 1, 2010. The New Act also applies the credit to a purchase of a principal residence before July 1, 2010, if the taxpayer has entered into a written binding contract before May 1, 2010, with a specific closing date before July 1, 2010.
 
Practice Note:  When doing residential contracts, it will be essential to make sure that the contract is entered into before May 1, 2010 and that the contract specifically provides for closing before July 1, 2010.
 
2.   As noted above, the tax credit phased out for taxpayers with adjusted gross incomes between $75,000 and $95,000 ($150,000 and $170,000 for married filing jointly). The New Act changes these income limitations to $125,000 and $145,000 (single) and $225,000 and $245,000 (married filing jointly).
 
Practice Note:  The higher income limitations for phaseout obviously greatly expand the universe of taxpayers who will be eligible for the credit.
 
3.   Under the New Act, it is no longer necessary that the taxpayer be a "first time" home buyer. For purchases after November 6, 2009, any individual who has maintained the same principal residence for any 5 consecutive year period during the 8 year period ending on the date of purchase of the residence is treated as a first time homebuyer. However, for taxpayers who are not actually first time home buyers (that is they are relying on the 5 and 8 year rule), the credit is limited to $6,500.00 (rather than $8,000.00). Again, this greatly increases the number of eligible taxpayers.
 
4.   The prior law did not have a maximum home price eligible for the credit. The New Act now sets an $800,000 maximum purchase price. If the price is $800,001, the purchase is not eligible for the credit.
 
5.   Any purchase made after 2008 can be treated as made on December 31 of the calendar year preceding the actual date of purchase. For example, a purchase made on December 1, 2009 can be treated as made on December 31, 2008. This is significant because it allows the taxpayer to amend his 2008 return and get the refund without having to wait to file his 2009 tax return.
 
6.   For purchases after November 6, 2009, the credit cannot be claimed unless the taxpayer is at least eighteen (18). Also, the credit cannot be claimed by a taxpayer who is a dependent of another taxpayer. These two rules are to prevent gaming the system by using a child to take title to a residence. The child came in handy before because the child's income was likely lower than the maximum income limits and also was most likely to qualify as a first time homebuyer.
 
7.   The taxpayer must attach to his tax return a properly executed copy of the settlement statement for the purchase.
 
8.   For purchases after November 6, 2009, a purchase of property from a person related to the taxpayer will no longer qualify for the credit.
 
9.   The IRS is given liberalized powers to assess penalties and additional tax in the case of improperly claimed credits.
 
How To Work With These Rules.
 
            Now that you have an outline of the rules, below are some thoughts on how to work with the credit:
  • As noted above, timing will be everything with respect to this credit. It is altogether possible that the credit could get extended again, but for now, you will want your purchases to occur before May 1, 2010 (not on May 1, 2010), or at least have contracts entered into before that date. Again, if you are relying on a contract, the contract must provide for closing before July 1, 2010. It is not clear what effect the ability to extend closing would have on qualification for the credit, so it would be best not to have such provisions in your contracts.
  • Watch out for the $800,000 purchase price limitation.
  • Because of the new 5 and 8 year rule and the change in the income limits, the universe of taxpayers qualifying for this credit will be greatly expanded. In fact, it will probably apply to the typical homebuyer who has been living at the previous residence for some time and is now purchasing a new one. It will not apply to "flippers" but will, as noted, apply in many situations. Thus, it will be very important to find out from clients going into a deal whether they qualify for the credit and therefore whether their deal can be structured to make sure that they qualify. For attorneys advising real estate brokers, it will be important to educate them on these rules as well. As the brokers often draft contracts, it will be essential that they understand the timing issues.
  • For clients planning to buy a home or condo for a child attending college, it may make sense to have the child purchase the condo in his or her own name. Because the child will probably qualify as a "real" first time homebuyer (as opposed to someone relying on the 5/8 year rule) and is likely over eighteen, the child should qualify. Keep in mind that the credit is refundable whether or not the child actually owes any tax. Note that this is a little complicated because the parent will probably not qualify to deduct the mortgage interest and property taxes paid on the condo on the parent's return. However, the child may be able to deduct these items and get some tax benefit. If the parent pays cash, interest deductibility will not be an issue. In any case, it will be important to analyze this trade off.
  • None of these tax credit rules affect a taxpayer's ability to sell an existing home without gain. The rules of Code Section 121 which excludes $250,000 in gain ($500,000 for married filing jointly) remain in effect.
Still a Logistical Problem.
 
          One problem with the tax credit is that the cash from the credit is not available to the taxpayer when actually purchasing the home. This means buyers still need to come up with all needed funds at closing. Still, for those who can float the cash at the time of purchase, the credit represents a big incentive to buy a home (and is now available to most taxpayers).
About the Writer

Desmond G. Sheridan is a partner in the Greensboro law firm of Isaacson Isaacson Sheridan & Fountain, LLP and is a certified public accountant.  His practice areas are business transactions, tax, corporations, limited liability companies, commercial real estate and estate planning.  Sheridan has served on the Board of Directors of the North Carolina Association of Certified Public Accountants and has been recognized as a "Best Lawyer in America," a North Carolina "Super Lawyer" and a member of the "Legal Elite" by Business North Carolina.  He has given numerous continuing education presentations to CPAs and attorneys.

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