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Wednesday, October 6, 2010

Unemployment Benefits Act Also Provides More Opportunities For Homebuyers


On November 6, 2009, President Obama signed into law the Worker, Homeownership and Business Assistance Act of 2009 (WHBAA). In addition to extending unemployment benefits for millions of Americans and enhancing net operating loss tax breaks for businesses, the act extends, expands and enhances a popular tax break: the first-time homebuyer credit.

The Credit Up Close

Last year, a refundable tax credit equal to 10% of the purchase price of a principal residence was made available to qualified first-time homebuyers. This credit was set to expire July 1, 2009, but in February the American Recovery and Reinvestment Act of 2009 (ARRA) extended its availability to purchases made before Dec. 1, 2009. Now, as this purchase deadline approaches, WHBAA has extended it further to purchases made before May 1, 2010 - or July 1, 2010 if a binding contract is in place before May 1, 2010 to close on the purchase before July 1, 2010. (For certain service members and intelligence employees, the credit is extended for an additional year.)

Under WHBAA, the maximum credit remains at $8,000 ($4,000 for married filing separately) for first-time homebuyers. For purposes of the credit, a first-time homebuyer is someone who has had no ownership interest in a principal residence in the United States during the prior three-year period.

WHBAA also extends the ARRA provision that generally eliminated the repayment obligation for taxpayers whose qualifying purchase occurs after December 31, 2008.

For purchases before 2009 that qualified for the credit, taxpayers generally must repay the credit received over a 15-year period but with no interest. Additionally, this "recapture" generally applies in situations where a qualifying purchase occurs in 2009 or later but the home is sold (or ceases to be used as a principal residence) within three years of purchase. In these cases the credit is more of an interest-free loan from the government than a genuine tax credit. WHBAA also extends the provision that allows taxpayers to accelerate the credit. Taxpayers eligible for the credit can elect to treat the home purchase as being made on December 31st of the preceding calendar year for tax purposes. So, for example, if you purchase a home in early 2010, you can claim the credit on your 2009 tax return and reap the tax savings a year early.

Expanded and Enhanced Benefits

As mentioned, WHBAA does more than just extend the credit; it also expands and enhances it:

Many "long-time" homeowners purchasing a subsequent home are now eligible. The maximum credit for these taxpayers is $6,500 ($3,250 for married filing separately). To qualify, the homeowner must have maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the purchase date of a subsequent principal residence. This is simple to determine if the home has been your principal residence for the past five years, but how does it apply in other situations?

Let's look at an example. (See chart below for illustration.) Say that on January 1, 2007, you relocated for your job. Instead of selling the home that had been your principal residence since January 1, 2002 (five years), you decided to rent it out because there was a possibility your relocation might be only temporary. That turned out to be true, and you moved back to the home January 1, 2008. You relocated permanently, however, on January 1, 2009.

Because the housing market was so bad, you decided to rent out the home again. You've now decided that you're ready to sell the home and purchase a home in your current location (where you've been renting) that will be your principal residence. As long as you purchase the new home by January 1, 2010, you'll satisfy the five-of-eight-years test.

 

Year 1

2009

You rent out your home. You rent a principal residence in the new location.

Year 2

2008

Your home is your principal residence.

Year 3

2007

You rent out your home. You rent a principal residence in the new location.

Year 4

2006

Your home is your principal residence.

Year 5

2005

Your home is your principal residence.

Year 6

2004

Your home is your principal residence.

Year 7

2003

Your home is your principal residence.

Year 8

2002

Your home is your principal residence.

Some higher-income taxpayers are now eligible. WHBAA significantly increases the modified adjusted gross income (MAGI) phaseout ranges for the credit. For qualifying purchases made after November 6, 2009, the credit starts to phase out for joint filers with MAGIs exceeding $225,000 ($125,000 for single filers). It's completely eliminated for joint filers with MAGIs exceeding $245,000 ($145,000 for single filers). For purchases on or before November 6, the phaseout ranges are significantly lower: $150,000-$170,000 for joint filers and $75,000-$95,000 for single filers.

A waiver of credit "recapture" is available to certain service members and intelligence employees. WHBAA provides a recapture waiver when a home is sold (or ceases to be used as a principal residence) after December 31, 2008, in connection with government orders received by the homeowner (or his or her spouse) for qualified extended duty service, such as by a member of the uniformed services, a member of the U.S. Foreign Service, or an employee of the intelligence community.

A Few New Limits

WHBAA does add a few new limits, primarily directed at curbing potential abuse of the credit. Effective for purchases made after November 6, 2009, no credit is allowed if:

  • The home's purchase price exceeds $800,000 (regardless of regional market factors),
  • The homebuyer (or his or her spouse) is related to the seller,
  • The homebuyer is under age 18 on the date of purchase (unless his or her spouse meets the age requirement), or
  • The homebuyer is the dependent of another taxpayer.

There are other limitations as well, so it's important to consult your tax advisor to determine whether you're eligible for the credit.

Year end Planning Tip

Even if you don't qualify for the credit, your adult children or grandchildren might. So if you've been thinking about making a gift to help them fund a down payment, now may be a great time to do it. In addition to benefiting from the credit, they also can take advantage of low housing prices and interest rates. But you must carefully consider the gift tax consequences.

Under the annual exclusion, for 2009 and 2010 you can gift $13,000 ($26,000 if you split the gift with your spouse) per recipient per year free of gift tax without using up any of your lifetime gift tax exemption. So, say, you haven't made any annual exclusion gifts to your daughter this year. You and your spouse could give her as much as $26,000 by December 31, 2009 and another $26,000 as soon as January 1, 2010 at no gift tax cost - leaving her with a sizable amount for a down payment.

Act Soon

It's possible this valuable tax break won't be extended again. So you'll need to act soon to ensure you (or your loved ones) will benefit. The credit is also subject to complex rules and limits, so the assistance of a tax advisor is critical. Please contact us to learn more about how to take advantage of this break and other strategies to consider in your 2009 year-end tax planning.

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