First-Time Buyers in D.C. Have Two Tax Credits to Assess

The federal government is giving first-time home buyers some credit -- actually, two of them.

The on-again, off-again D.C. first-time home buyer tax credit has been revived. If you buy a home -- including a condominium or cooperative -- in the District between Jan. 1, 2008, and Dec. 31, 2009, you may be eligible for a tax credit of up to $5,000.

There is a separate tax credit available to people who purchase a home anywhere in the country between April 9, 2008, and July 1, 2009. Under this program, you may be eligible for a tax credit of up to $7,500. But there's a string attached: The credit has to be repaid.

What's a tax credit? Generally, it means your federal income tax obligation is reduced a dollar for every dollar of the credit. For example, if you received the full $5,000 this year, and you would otherwise owe $10,000 in income tax when you file your income tax return, you would instead owe only $5,000.

This is significantly different from a tax deduction. If you are in the 20 percent tax bracket, a $5,000 tax deduction saves you just $1,000.

The D.C. tax credit, first enacted in 1997 and renewed periodically since, is designed to bolster the city's economy. You are eligible for the credit as long as you have not owned a home in the District for one full year before you buy. The home you buy must be your principal residence. There are income requirements, too. The credit begins phasing out if you earn $70,000 annually ($110,000 for married couples filing jointly). It dwindles down to zero for those earning $90,000 ($130,000 for joint filers).

The other home buyer tax credit was included in this year's housing recovery legislation. To be eligible, you have to purchase your primary home between April 8, 2008, and July 1, 2009, and you have to be a "first-time home buyer." This law defines a first-timer as a person who has not owned a home in the three years prior to the purchase.

The credit is the lower of $7,500 or 10 percent of the purchase price. In most cases, unless you buy something for less than $75,000, you may be eligible for the full credit.

This credit also has income requirements. It begins phasing out for the those with income of $75,000 ($150,000 for joint filers). It is reduced to nothing for those making $95,000 or more ($170,000 for joint filers).

The National Association of Home Builders, an enthusiastic backer of the credit, has created a Web site ( http://www.federalhousingtaxcredit.com) that addresses questions related to the law, including how the credit phaseout works.

However, this is not a tax credit in the usual sense, the way the D.C. credit is. In reality, it is an interest-free loan.

You pay this loan back in equal yearly installments over 15 years. The first installment of the repayment will be due in the second taxable year after the house was purchased. Thus, if you take the credit on your 2008 tax return, your first payment will be due when you file your 2010 tax return.

If you purchase your first home in 2009 (before the July 1 deadline) you have the right to elect to take the credit when you file your 2008 tax return. This will be helpful for buyers who know what their income will be this year, but are uncertain as to what it will be next year.

If you sell the house -- or no longer use it as your principal residence -- the balance of the repayment becomes due. The repayment, however, cannot exceed the amount of profit you make on the sale.

If the homeowner dies, there will be no recapture. But, according to the IRS in a recent explanation of this new law, "if you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount."

As usual with tax measures, there are a lot of details. For instance, if the house is foreclosed upon, there will be no acceleration of repayment if a new principal residence is purchased within two years. And if there is a transfer to one spouse (or to a former spouse) incident to a divorce, the ex-spouse who gets the house will be legally obligated to pay the recaptured tax credit.

The IRS has issued a list of those who are not eligible to take the credit. The list includes: people buy their home from a close relative, which includes a spouse, parent, grandparent, child or grandchild; nonresident aliens; those whose home financing comes from tax-exempt mortgage revenue bonds; or buyers who are, or were, eligible to claim the D.C. first-time homebuyer credit for any taxable year.

The word "eligible" makes it clear that unless your income is over the District's threshold but below the federal guidelines, you cannot pick and choose if you are buying in the District. If you take the D.C. credit, you're not eligible for the federal one. (See Internal Revenue Service IR-2008-106, available at http://www.irs.gov.)

The intent of this law is to spur people into buying a house. But the repayment requirement can affect the tax basis of your property, which can lead to a different amount of profit for state tax returns as compared with the federal tax return.

Would-be buyers outside the District should carefully review all the implications -- tax and monetary -- before opting to take the credit. This should not discourage you from buying now, if you find the right house. You have until next year before you need to make the election.

And if you plan to own and live in the District, discuss your options with your tax advisers.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site,http://www.kmklawyers.com.