One of the most important catalysts to the booming real estate market in the District has been given new life. Last week, as part of the federal budget package, Congress extended the $5,000 D.C. first-time home-buyer's tax credit for one more year, through Dec. 31, 2001.
The credit, which affects only the District, was originally enacted as part of the Taxpayer Relief Act of 1997. Under the program, if you buy a home in the District, including a condominium or cooperative apartment, and it will be your principal residence, you may be eligible for a credit against your federal taxes of up to $5,000.
This tax credit was set to expire for homes bought after Dec. 31, 2000. The one-year extension came at the urging of D.C. Del. Eleanor Holmes Norton (D). "I was able to get the credit extended because it is carefully targeted and has proved itself in helping to stabilize our population loss and to bring new residents to the city," Norton said.
The law has been extremely successful. An independent study by the Greater Washington Research Center has concluded that more than half of those who bought homes after 1997 said that the tax credit was a significant factor in their decision.
To understand what a gift this is to new D.C. residents, let's define the concept of "tax credit." Oversimplified, it reduces the amount of tax you have to pay by the amount of the credit.
Compare a "credit" with a "deduction." The latter is subtracted from either gross income or adjusted gross income, thereby reducing the amount of income that is subject to tax. Examples of deductions are mortgage interest payments, points paid to obtain a mortgage loan and real estate taxes.
A credit, in contrast, is subtracted from the amount of income tax the taxpayer would otherwise owe. It is a dollar-for-dollar reduction in tax liability. Examples of credits include education credits, child tax credits and foreign tax credits.
Who is eligible for the D.C. home-buyer credit? Under the law, it makes no difference whether you have owned--or still own--property anywhere else in the world. It makes no difference if you previously obtained tax credits from Maryland or any other locality or state.
Instead, if you meet the law's quirky definition of a "first-time home buyer," and the transaction passes some other tests, you are eligible for the credit. Under that definition, the home buyer (and spouse if married) cannot have had any principal residence ownership interest in any other D.C. property for a one-year period ending on the date of the purchase of the home. That means you may be eligible even if you already own a home elsewhere. Or, if you own other real estate in the District but it is not your principal residence, and has not been for a one-year period ending on the date of the new purchase, you are still eligible for the tax credit.
According to the law, the home must be purchased from Aug. 5, 1997, to Dec. 31, 2001. This language means what it says: "purchased" and not "contracted for." In other words, you actually would have to settle on--and take legal title to--the house after Aug. 5, 1997, and before the end of 2001.
There are no restrictions on the amount of the purchase price nor on the location within the District of the property.
There are, however, income limitations. Single filers with "modified adjusted gross income" up to $70,000 are eligible for the full credit. The credit amount slides down as income rises. The credit disappears for those with incomes of $90,000 and above. For joint tax filers, the full credit is available to those with incomes up to $110,000; no credit is available when income passes $130,000. Married taxpayers filing separately are eligible only for half the credit; unmarried filers buying a residence together split the credit according to a formula set by the Treasury Department.
Adjusted gross income is a number that is between gross income and taxable income. You can find it on Line 33 of your 1998 Income Tax 1040 Return. Modified AGI is your AGI plus any amount excluded from your income as a foreign earned income, or because the income came from such places as Guam, American Samoa or Puerto Rico.
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.