Homebuyer Credit: 10 Things You Never Knew

The first-time homebuyer credit came into law in April 2008 as a way to stimulate the sagging housing market. Back then, the credit limit was $7,500 and, in most cases, it had to be repaid to the government (essentially an interest-free loan). In February 2009, the credit was increased to an $8,000 limit, the repayment rule was eliminated (other than for those who cease using the home within 36 months of purchase), and it ran through November 30, 2009. In November 2009, it was again extended; it now runs through April 30, 2010 (or an extra 60 days if there is a contract for purchase signed by April 30). The credit has also been expanded to include non-first-timers, although they are allowed only a limited credit. Here are 10 nuances in the rules for claiming the credit:

1. You don’t have to be a first-timer to get the credit.

Under the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92), long-time residents can qualify for a modified credit. The credit cannot exceed $6,500 ($3,250 for a married person filing separately). The taxpayer must have maintained a principal residence for 5 consecutive years of the 8 years ending on the date of the purchase of a new home. As with first-timers, income limits apply.

2. Purchasing from an in-law doesn’t bar the credit.

The credit cannot be claimed by a taxpayer who buys the home from a related person. For purposes of the credit, a related person is a spouse, ancestor, or lineal descendant; it does not include persons related by marriage.

Thus, if a husband and wife purchase a home from the husband’s parents, the wife can be eligible for the credit (INFO 2009-0131, 6/15/09). While the husband is ineligible for the credit because he is related to the sellers, the wife is not barred from taking the credit because she is not viewed as related to the sellers.

3. Mobile home is a principal residence for the credit.

The credit applies to the purchase of a principal residence. To be a first-time homebuyer, the taxpayer (and spouse) cannot have owned a home within 3 years of the date of purchase. The IRS says a mobile home can be a principal residence (INFO 2009-0132, 6/15/09). It used this determination to bar a couple who owned a mobile home and then bought a house from claiming the credit because they were not first-timers (if they had purchased after November 6, they may have qualified for a credit for long-time residents).

A principal residence for this purpose includes a house, houseboat, house trailer, mobile home, cooperative apartment, and condominium. 

4. The credit can be claimed even though the seller retains legal title.

If, under a seller-financing arrangement, the seller retains title until the buyer has completed payment, the buyer can still be treated as the owner for purposes of the credit (IRS Information Letter 36.00-00, 6/25/09 and 7/10/09). As long as the buyer takes on the “benefits and burdens” of ownership of the home, then the buyer can claim the credit even though the seller technically holds title.

Examples of seller financing where this can result: contract for deed, installment land sale contract, or long-term land contract, such as a Michigan land sale contract.

Factors indicating the benefits and burdens of ownership include (1) the right of possession, (2) the right to obtain legal title when full payment is made, (3) the right to construct improvements, (4) the obligation to pay property taxes, (5) the risk of loss, (6) the responsibility to insure the property, and (7), the duty to maintain the property.

5. The credit cannot be claimed by a nonresident alien.

Today, because of low housing prices and the value of the U.S. dollar, foreigners are buying homes in the United States. Such individuals, if they pay U.S. taxes, cannot claim the credit (Code Sec. 36(d)(3)); the credit can be claimed only by U.S. citizens and resident aliens.

6. Young buyers may be barred from the credit.

The law makes it clear that no credit can be taken by someone who can be claimed as another taxpayer’s dependent.

Also, the buyer must be at least 18 years old. If the young buyer is married, he or she can be treated as meeting the age requirement if the spouse meets the age requirement.

7. Expensive homes don’t qualify for the credit.

Any home purchased after November 6, 2009, cannot qualify for the credit if the purchase price exceeds $800,000. There was no dollar limit on the purchase price on or prior to this date.

8. There are different income limits, depending on the purchase date.

When you closed on the home purchase dictates the income limits that apply to you.

• If you purchased your home before November 7, 2009, the full credit applies only if modified adjusted gross income (MAGI) is no more than $75,000 for singles, or $150,000 for joint filers.
• If you purchased your home after November 6, 2009, the full credit applies only if MAGI is no more than $125,000 for singles, or $225,000 for joint filers.

9. Having a nonqualified cosigner doesn’t spoil the credit.

A person whose parent cosigns the mortgage can claim the credit even though the parent is not a first-time homebuyer (e.g., already owns a home) (www.irs.gov/newsroom/article/0,,id=206294,00.html). As long as the person qualifies in his/her own right, the credit can be claimed.

10. There’s no credit recapture for those on official extended duty.

For homes purchased prior to 2009, there is a 15-year recapture period; for homes purchased after 2008, there’s recapture if the home ceases to be a principal residence within 36 months of purchase. Under a new law, the sale or cessation of use as a principal residence by someone who is on qualified official extended duty does not trigger any recapture. This applies to members of the uniformed services, Foreign Service, or the intelligence community who are required to be at least 50 miles away from the home for a period in excess of 90 days or indefinitely.