Who Qualifies For Home Buyers' Tax Credit?

Q: I recently read that if my spouse or I did not own a home in the three years before settling on a new home, we are entitled to claim a tax credit of up to $8,000. I own a condo, but my husband has never owned a home. We just signed a contract to purchase a home and settlement will take place within the next few weeks. Are we eligible for this credit?

A: Unfortunately, the quick answer is no. The new law -- and the IRS -- have made it very clear that to qualify for the tax credit, neither the taxpayer nor his or her spouse can have any ownership interest in a principal residence within three years of the date of purchase.

Let's quickly review the new law, because it makes a difference if you bought your house in 2008 or this year. For purchases in 2008, eligible first-time home buyers were entitled to a tax credit of up to $7,500. However, there was a catch: The "credit" had to be repaid in 15 equal installments beginning in 2010.

Congress recognized that this was not a real incentive to stimulate home-buying, so for homes purchased this year -- but not later than Nov. 30 -- the credit was increased to $8,000. More importantly, unless you sell the house or it stops being your principal residence within three years of the purchase date, there is no obligation to repay the credit.

A number of legal and factual questions are involved in determining whether you are able to claim the credit. First, there are income limitations. If you are single or file a separate income tax return, you qualify for the full credit if your income is not more than $75,000. This is raised to $150,000 for married couples who file a joint tax return. Note that the credit is phased out for singles with income up to $95,000 and for married people up to $170,000.

Second, when can you claim the credit? If you bought in 2008, you must file IRS Form 5405 with your income tax return. If you did not get an extension for your 2008 return, which runs through Oct. 15, you can file an amended return. Confirm this with your tax adviser.

If you bought your home this year and qualify for the credit, you have a choice: Claim the credit on your 2008 tax return (or file an amended return) or claim the credit when you file your 2009 return. Consult a tax professional to determine which route is best for you.

The thorny questions go to each person's individual situation. The reader who posed the question would not be eligible, but what if her husband bought the house in his name only? While the IRS has not yet addressed this issue, I believe that a good case can be made that he would qualify. He would, however, have to file a separate tax return. He could later add his wife to the title.

What if you own a rental property? According to the IRS, since that property is not used as a principal residence, you are still eligible for the credit.

A single person who qualifies for the credit will not lose it if he or she gets married after the purchase. The IRS has made it clear that the trigger date is the date that you take title to the house; what you do with the house later does not impact the tax credit, unless you sell it or move out within three years of purchase.

What if you owe money to the IRS? Recently the agency made clear that the first-time home buyer credit is subject to the same rules as any other refund. In other words, the credit would be applied to your IRS debt.

Here in the Washington area, there are many taxpayers who own property outside of the United States. Calling that home your primary residence does not preclude you from getting the credit if you decide to buy a home in this country.

There's a catch for some D.C. residents. If you bought your home last year in the District, you meet the income restrictions ($70,000 for single taxpayers or $110,000 for joint filers) and have not owned a principal residence in the District for at least one year, you are eligible for just a $5,000 D.C. tax credit. But unlike the $7,500 credit, this does not have to be repaid.

If you buy a house in the District this year before Dec. 1, you may have the option to take either the $5,000 D.C. credit or the $8,000 credit. If you cannot qualify as a first-time home buyer under the federal credit, you may qualify for the D.C. one.

Interest rates remain low, as do home prices. Now is the time to consider buying that first home.

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, 1050 17th St. NW, Suite 1100, 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.