Tax Articles
IRS Issues Important Guidance on First-Time Homebuyer Credit
By: Terry Myers and Dee DeScherer
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More Flexibility for Allocating Credit between Unmarried Taxpayers
TIME-SENSITIVE: Affects 2008 and 2009 returns. The IRS has released a notice clarifying how the new first-time homebuyer credit is handled when a home is purchased by two or more people who are not married. The new notice provides unmarried taxpayers with flexibility when allocating the credit between them [Notice 2009-12].
Ground Rules. A first-time homebuyer is allowed a tax credit equal to the lesser of
- $7,500
- A 10 percent of the purchase price of a principal residence. [IRC Sec. 36(a),(b)]
The credit is phased out ratably for taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds statutory thresholds which vary by married status:
- Married taxpayers filing jointly: $150,000.
- All other taxpayers: $75,000.
The phase-out is complete at a specified ceiling. No credit can be claimed when MAGI exceeds certain limits:
- Married taxpayers filing jointly: $170,000
- Other taxpayers: $95,000.
To Qualify, Timing Matters
The credit is available only for homes purchased after April 8, 2008, and before July 1, 2009 [IRC Sec. 36(h)].
The credit is refundable, so eligible homebuyers will receive the credit in the form of a full or partial refund to the extent it exceeds their tax bill for the year. However, the credit is also subject to recapture—it must be paid back ratably over a 15-year period starting with the second year after the home is purchased.
For purposes of the credit, a first-time homebuyer includes any individual who had no present ownership interest in a principal residence during the three-year period ending on the date of the purchase of the home for which the credit is claimed [IRC Sec. 36(c)(1)].
New IRS Notice. The IRS says that if two or more taxpayers who are not married purchase a principal residence, the credit may be allocated between them 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 the credit.
"Any Reasonable Method." A reasonable method includes allocating the credit between taxpayers who are eligible to claim the credit based on either
- The taxpayers' contributions towards the purchase price of a residence as tenants in common or joint tenants.
- The taxpayers' ownership interests in a residence as tenants in common.
Applying the New Guidance
Several examples will show how the guidance plays out in several scenarios.
Example 1. Bob and Joan are unmarried taxpayers who are qualifying first-time homebuyers. Neither has MAGI of more than $75,000. They purchase a principal residence on May 1, 2008. Bob contributes $10,000 for a down payment towards the $100,000 purchase price and Bob and Joan are jointly liable for a $90,000 mortgage for the remainder of the purchase price. Each owns a one-half interest in the residence as tenants in common.
Bob and Joan may allocate the allowable $7,500 credit 55% to Bob and 45% to Joan based on their contributions toward the purchase price or 50% to each based on their ownership interests in the residence.
However, Bob and Joan may also use any other allocation since they are both eligible for the credit. For example, either Bob or Joan may claim the entire credit.
Example 2. Same facts as in Example 1, except that Joan has MAGI of $100,000. Because Joan's MAGI exceeds the $95,000 MAGI cap, any portion of the credit allocated to her would be reduced to $0.
Bob and Joan may allocate the entire allowable $7,500 credit to Bob because Bob's MAGI is less than the $75,000 MAGI threshold and, therefore, Bob is eligible to claim the entire allowable credit.
The IRS points out that an acquisition will qualify as a purchase for credit purposes, only if both of two conditions apply:
- The property is not acquired from a person related to the person acquiring the property.
- The basis of the property in the hands of the person acquiring the property is not determined either
- (a) in whole or in part by reference to the adjusted basis of the property in the hands of the person from whom the property is acquired, or
- (b) under Section 1014(a) (relating to property acquired from a decedent). [IRC Sec. 36(c)(3)].
We'll look at one more scenario.
Example 3. Same facts as in Example 1, except that Bob pays the entire $100,000 purchase price of the residence and is the sole owner. On June 1, 2008, Bob transfers a one-half interest in the residence to Joan as a tenant in common for $10,000.
Bob may claim the entire allowable $7,500 credit. Because Joan acquired her interest in the residence from Bob in part by gift, Joan's basis in the residence is determined by reference to Bob's basis in the residence. Therefore, Joan did not make a qualifying purchase and no portion of the credit may be allocated to her.
Reach Out to Clients
So you can reach out to clients or prospects on this issue, we've prepared a brief introduction and invitation that you can print to letter head or paste into an email to your clients.
The introduction is in the form of Microsoft Word document. Download to your computer to save and modify as appropriate.
Terence M. Myers, J.D. and Dorinda D. DeScherer, J.D. are nationally renowned writers on tax topics for such publications as Accountants Tax Weekly, Tax Return Preparer's Letter, Nonprofit Tax and Financial Strategies, and Executive's Tax and Management Report. For many years Myers was Managing Editor and DeScherer Assistant Managing Editor for many Prentice Hall tax newsletters. Myers and DeScherer have published books and other publications with Harcourt Professional Publishing, Aspen Publishers, Prentice Hall, and the AICPA.
Last Updated: 02/06/2009
