The tax-cut law that President Bush signed Monday revives the D.C. first-time home buyer tax credit, a tax break that had expired Jan. 1.
The credit, which is now available until Jan. 1, 2006, gives a tax break of as much as $5,000 to some D.C. home buyers. It's retroactive to the beginning of this year.
That means the credit, which first went into effect in 1997, is now available to a new crop of home buyers. Let's look at how it works.
If you are buying your first home in the District, and it will be your principal residence, you may be eligible 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 in the world. You may be eligible for the credit if this is your first home purchase in the District.
In fact, unlike similar state legislation that requires that you have never owned a house before, this law defines "first-time homebuyer" 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, as I read the law, 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 home, you will be eligible for this tax credit. Conversely, if your parents have put you on a title -- for tax or other purposes -- on a D.C. property, you will not qualify for this new credit.
However, the law does state that a taxpayer can take advantage of the credit "one-time only".
Look at Line 51 (b) of your 2003 income tax return (Form 1040). There is a reference to IRS Form 8859 (titled "District of Columbia First-Time Homebuyer Credit"). As you will see, the credit will reduce -- dollar for dollar -- a taxpayer's tax liability. That's more generous than a tax deduction.
Who is eligible for the credit? According to the law, the home must be purchased between August 4, 1997 and January 1, 2006. There is no statutory definition of the word "purchased." Accordingly, unless the Internal Revenue Service or the courts tell us differently, one would have to assume that this language means what it says: "purchased" and not "contracted for." In other words, you would have to have settled on the house after Aug. 4, 1997 and by Jan. 1, 2006.
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.
To set those limitations, Congress used the concept of "modified adjusted gross income." AGI is a number that is between gross income and taxable income. You can find this number on Line 34 of the 2003 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.
You compute the credit as follows:
* Joint tax filers. You get the full credit until your modified AGI reaches $110,000. For every $1,000 of modified AGI above this number, the credit is reduced by $250. Once your AGI exceeds $130,000, no credit may be taken.
* Single tax filers. You get the full credit until your modified AGI reaches $70,00. Then, for every $1,000 of modified AGI above this number, the credit is reduced by $250. Once your AGI exceeds $90,000, no credit may be taken.
(Married taxpayers who file separately can get only up to $2,500 from the tax credit.)
If two or more unmarried individuals purchase a principal residence, they can split the tax credit. In no case may the total exceed $5,000. The law requires the secretary of the Treasury to prescribe the method of allocating the tax credit.
Although the concept is simple, the law is complex. Congress wanted to encourage taxpayers to move into the District and purchase a home here. If you are planning to purchase a house shortly, consult your tax and legal advisers before signing a purchase and sales agreement.
It is important to note that the credit is retroactive to January 1, 2004. So if you bought a house, condominium or cooperative apartment this year, remember to take advantage of the credit when you file your 2004 income tax return next year.
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.