A much publicized tax incentive intended to entice first-time home ownership is scheduled to expire soon. The American Recovery and Reinvestment Act of 2009 ("Act") includes an amendment to the Internal Revenue Code commonly referred to as the First-Time Homebuyer Credit ("Credit"). The Credit allows a first-time homebuyer to claim an income tax credit in the amount of 10 percent of the purchase price of any property used as their principal residence, up to a maximum of $8,000.00.
Under the Act, a first-time homebuyer ("homebuyer") is anyone who has not had an ownership interest in their principal residence during the three years prior to the date of purchase of the property. If the homebuyer is married, his or her spouse must also qualify in order to claim the Credit. The Credit cannot be claimed if the homebuyer’s adjusted gross income is greater than $95,000.00 ($170,000.00 if married filing jointly).
The Credit applies to any purchase of a principal residence completed after April 8, 2008, and before December 1, 2009. The Credit may be used to purchase any property so long as the homebuyer continues to occupy such property as their principal residence and does not sell the property before the end of 2009. Additionally, the property may not be purchased from anyone related to the homebuyer.
A prior version of the Act required the credit to be repaid in equal installments over 15 years, essentially serving as a no-interest loan from the government. The 2009 Act, however, provides that the Credit does not need to be repaid for purchases completed between January 1, 2009, and November 30, 2009, so long as the property is not sold within the three years following the purchase date. As an added benefit, homebuyers may claim the Credit in either the 2008 or 2009 tax year, no matter when the purchase occurred. A homebuyer who has already filed his or her 2008 tax return may file an amended return to claim the Credit in that year.
A related issue facing homebuyers and their families concerns cash gifts used as down payment on a mortgage. While the terms and conditions of a mortgage will vary from lender to lender, a common player in first-time home purchases is the Federal Housing Administration (FHA). The FHA’s position is that an outright gift is acceptable so long as the gift donor ("Donor") is not a person or entity with an interest in the sale of the property, such as the seller, real estate agent or broker, builder, or any entity associated with them. The FHA requires a gift letter from Donor stating that Donor intends to make a gift to the homebuyer and that Donor is claiming no interest in the property. Prospective donors should seek the advice of tax counsel before making any gifts.
If you have any questions regarding the American Recovery and Reinvestment Act of 2009 or the application of the First-Time Homebuyer Credit, please contact a member of the firm.
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