New Tax Law Gives Home Buyers a Break or Two

President Bush this week signed a law that includes almost 200 tax changes, at least two of which are potential money savers for home buyers.

First-time D.C. home buyers: If you are buying your first home in the District, and it will be your principal residence, you may be eligible for a credit against your federal taxes of up to $5,000. It makes no difference if you have owned -- or still own -- property anywhere else. The law defines "first-time home buyer" to mean "any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence in the District of Columbia during the one-year period ending on the date of the purchase of the principal residence to which this section applies."

Thus, even if you owned a house in the District several years ago, as long as you did not own any property in the city for at least one year before purchasing a new one, you could be eligible for the tax credit.

If this sounds familiar, it is. It dates back to a law enacted in 1997, which expired Dec. 31, 2005. However, Congress reinstated the law, retroactive to Jan. 1, 2006. It will expire again on Dec. 31, 2007.

Economists and real estate professionals have called the exemption a key factor in the housing boom in the District over the past several years. Del. Eleanor Holmes Norton (D-D.C.), who pushed the measure in Congress, said: "Even in today's cooling housing market, home prices are out of reach for many D.C. residents. The $5,000 home buyer credit is desperately necessary in this town today."

A tax credit is different from a tax deduction, and more generous. It reduces the amount of tax you owe by the amount of the credit, dollar for dollar.

There are no restrictions on the amount of the purchase price, nor on the location of the property in the District. There are, however, income limits that phase out the credit for higher-income buyers.

· Joint tax filers get the full credit until their modified adjusted gross income reaches $110,000. Then for every $1,000 of AGI above this number, the credit is reduced by $250. Once the AGI exceeds $130,000, no credit is available.

· Single tax filers get the full credit until their modified AGI reaches $70,000. Then, for every $1,000 of AGI above this number, the credit is reduced by $250. Once your AGI exceeds $90,000, no credit is available.

Although the concept is simple, the law is complex. Congress wanted to continue to encourage taxpayers to move into the District and purchase homes. If you are planning to buy a house soon, consult your tax and legal advisers before signing that purchase and sales agreement.

It is important to note that the law is retroactive to Jan. 1, 2006. So if you purchased a house, condominium or cooperative apartment this year, you can take advantage of the credit when you file your income tax forms next year.

You should obtain IRS form 8859, "District of Columbia First-Time Homebuyer Credit" which is available online from the Internal Revenue Service ( http://www.irs.gov/; click on Forms and Publications).