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• Federal Library

• Tax Legislation

• Complete Analysis of the Housing Assistance Tax Act of 2008

• Organization of the Complete Analysis

• Analysis

• Chapter 100 HOMEOWNER PROVISIONS

• 102 First-time homebuyers get refundable credit for 10% of purchase price up to $7,500 ($3,750 on separate return); credit must be recaptured over 15 years

¶102. First-time homebuyers get refundable credit for 10% of purchase price up to $7,500 ($3,750 on separate return); credit must be recaptured over 15 years

Code Sec. 36, as added by 2008 Housing Act §3011(a)
Code Sec. 26(b)(2)(W), as amended by 2008 Housing Act §3011(b)(1)
Code Sec. 6211(b)(4)(A), as amended by 2008 Housing Act §3011(b)(2)
Generally effective: Residences purchased after April 8, 2008, and before July 1, 2009
Committee Reports, see ¶5026

For purchases before 2008, an individual who hadn't had an ownership interest in a principal residence in the District of Columbia (and, if married, whose spouse hadn't had such an interest) in the one-year period before acquiring a principal residence in the District of Columbia was allowed a nonrefundable tax credit of up to $5,000 ($2,500 for a married individual filing separately) of the acquired residence's purchase price. The credit was phased out ratably between modified adjusted gross income (modified AGI, defined below) of $70,000 and $90,000 ($110,000 and $130,000 for joint filers). The residence's basis was reduced by the amount of the credit claimed. ( FTC 2d/Fin ¶A-4250; et seq. TaxDesk ¶568,800; et seq. USTR ¶1400C4; )

Under pre-2008 Housing Act law, there was no other tax credit for first-time homebuyers.

New Law. The 2008 Housing Act adds a new refundable tax credit for “first-time homebuyers.” (Code Sec. 36 as added by 2008 Housing Act §3011(a)) The amount of the credit is the lesser of $7,500 or 10% of the home's purchase price. The credit is phased out for taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers). (Com Rept, see ¶5026)

The credit is recaptured ratably over 15 years with no interest charge, beginning in the second tax year after the tax year in which the home is purchased. If the home is sold before the 15-year period ends, the remaining credit must be recaptured in the year of sale. If the sale was to an unrelated person, recapture is limited to the gain from the sale, determined by reducing the home's basis by the credit not previously recaptured. (Com Rept, see ¶5026)

RIA observation: The credit is equivalent to an interest-free loan of 10% of the home's purchase price, up to $7,500. (Summary of H.R. 3221, Housing Assistance Tax Act of 2008, July 21, 2008)

Allowance of credit.

An individual who is a first-time homebuyer (defined below) of a principal residence (defined below) in the U.S. is allowed a credit against income tax and alternative minimum tax (AMT) for the tax year of the purchase. (Code Sec. 36(a) ) The credit applies to principal residences purchased after April 8, 2008, and before July 1, 2009. (Code Sec. 36(h)

Amount of credit.

The credit is equal to 10% of the purchase price (defined below). (Code Sec. 36(a) ) The maximum credit is $7,500. (Code Sec. 36(b)(1)(A) ) For married individuals filing separately, the maximum credit is $3,750. (Code Sec. 36(b)(1)(B) )

RIA observation: Both individuals and married couples filing jointly can claim a $7,500 credit. (Description of The Housing Assistance Tax Act of 2008, JCX-27-08, April 8, 2008)

If two or more individuals who aren't married purchase a principal residence, the total credit allowed to all of the individuals is limited to $7,500. That amount is allocated among the individuals in the manner that IRS prescribes. (Code Sec. 36(b)(1)(C) )

Credit is refundable.

The first-time homebuyer credit is refundable. (Com Rept, see ¶5026) The credit is allowed by new Code Sec. 36, which is part of Subpart C of Part IV of Subchapter A of Chapter 1 (2008 Housing Act §3011(a)) of Subtitle A of the Code.

RIA observation: The credits in that subpart are refundable, i.e., the excess of those credits over the tax is considered an overpayment (see FTC 2d/Fin ¶A-4001; TaxDesk ¶568,501; USTR ¶64,014; ).

RIA illustration 1: A first-time homebuyer purchases a principal residence in 2008 and claims a $7,500 credit. The taxpayer's tax liability for 2008, before application of the credit, is $6,000.

The credit reduces the taxpayer's tax to zero. In addition, the taxpayer will receive a $1,500 refund.

Election to treat 2009 purchase as made in 2008.

Taxpayers who purchase a residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008. (Code Sec. 36(g) )

Making this election allows taxpayers to claim the credit on their 2008 tax returns. Taxpayers may amend their returns for this purpose. The election also establishes the beginning of the recapture period. (Com Rept, see ¶5026)

RIA illustration 2: A first-time homebuyer buys a principal residence in June 2009. She elects to treat the purchase as made on Dec. 31, 2008.

By making this election, the taxpayer will be able to claim the credit on her 2008 tax return. If the taxpayer has already filed her 2008 return, she can file an amended return to make the election and claim the credit.

The recapture period will run from 2010–2024 instead of 2011–2025. In effect, one of the recapture payments (6 2/3% of the total credit, see below) will be accelerated by 15 years (from 2025 to 2010).

The election applies for all credit purposes except the Code Sec. 36(c) definitions of “first-time homebuyer,” “principal residence,” “purchase,” “purchase price,” and “related person” (discussed below). (Code Sec. 36(g) )

RIA illustration 3: An individual owned a principal residence, which he sold in February 2006. The individual hasn't owned a home since then.

In March 2009, the individual purchases a new principal residence. He is a first-time homebuyer, because he hasn't owned a principal residence in the three-year period before the purchase (see “First-time homebuyer,” below).

If the individual elects to treat the purchase as made on Dec. 31, 2008, that election won't affect his status as a first-time homebuyer.

Phaseout of credit based on modified AGI.

The amount allowable as a credit is reduced (but not below zero) by the amount that bears the same ratio to the credit allowable as (Code Sec. 36(b)(2)(A) ) :

(1) the excess (if any) of:

·         the taxpayer's modified AGI for the tax year (Code Sec. 36(b)(2)(A)(i)(I) ) , over

·         $75,000 ($150,000 for a joint return), bears to (Code Sec. 36(b)(2)(A)(i)(II) )

(2) $20,000. (Code Sec. 36(b)(2)(A)(ii) )

Thus, the credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. (Com Rept, see ¶5026)

RIA observation: It appears that if a taxpayer elects to treat a purchase of a principal residence in the first half of 2009 as made on Dec. 31, 2008, the phaseout will be based on the taxpayer's 2008 modified AGI. This is because the election applies for all credit purposes except the definitions in Code Sec. 36(c) . The phaseout is in Code Sec. 36(b)(2) .

If so, the applicability of the phaseout may be a factor in deciding whether or not to make the election.

For this purpose, the term “modified AGI” means the taxpayer's AGI for the tax year increased by any amount excluded from gross income as a result of:

... the foreign earned income exclusion under Code Sec. 911, see FTC 2d/Fin ¶O-1100; TaxDesk ¶191,000; USTR ¶9114; ,

... the exclusion of income from American Samoa under Code Sec. 931, see FTC 2d/Fin ¶O-1432; USTR ¶9314; , or

... the exclusion of income from Puerto Rico under Code Sec. 933, see FTC 2d/Fin ¶O-1451; USTR ¶9334; . (Code Sec. 36(b)(2)(B) )

First-time homebuyer.

The term “first-time homebuyer” means an individual who had no present ownership interest in a principal residence during the three-year period ending on the date of the purchase of the principal residence to which the credit applies. If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period. (Code Sec. 36(c)(1) )

RIA observation: Thus, “first-time homebuyer” is a misnomer. An individual who has previously owned a home can qualify for the credit, if that ownership ended at least three years before the purchase of the home for which the credit is claimed.

RIA illustration 4: Taxpayer, a single individual, previously owned a principal residence, but sold it in 2003 and has since lived in rented quarters. Taxpayer is a “first-time homebuyer” for purposes of the credit, because more than three years have passed since Taxpayer's previous home ownership.

RIA illustration 5: Taxpayer, a single individual, previously owned a principal residence, but sold it on Nov. 1, 2005, and has since lived in rented quarters. He buys a new home in October 2008. Taxpayer isn't a “first-time homebuyer” with respect to that purchase. However, if he delays the purchase until the three-year period since his previous home ownership has ended, he would be a first-time homebuyer.

RIA illustration 6: H and W are a married couple. H has never owned a home, but W owned a home that she sold in 2003. H and W are “first-time homebuyers” for purposes of the credit.

RIA illustration 7: H and W are a married couple. H has never owned a home, but W owned a home that she sold in 2007. Neither H and W is a “first-time homebuyer” for purposes of the credit. W doesn't qualify because she owned a principal residence during the previous three years. H doesn't qualify because his spouse (W) owned a principal residence during that three-year period.

RIA observation: H in Illustration (7) won't qualify for the credit as a “first-time homebuyer” even if he files a separate return.

RIA observation: An individual whose principal residence is in rented quarters (and has been for at least three years) but who owns a vacation home can qualify as a first-time homeowner, because he has had no ownership interest in his principal residence.

Principal residence.

The term “principal residence” has the same meaning as under the Code Sec. 121 home-sale exclusion. (Code Sec. 36(c)(2) )

RIA observation: Code Sec. 121 doesn't define the term “principal residence.” Reg §1.121-1(b)(2) applies a “facts and circumstances” test for determining the taxpayer's principal residence. Ordinarily, a taxpayer's principal residence is the property that the taxpayer uses a majority of the time during the year, but the reg also lists other relevant factors. See FTC 2d/Fin ¶I-4522; TaxDesk ¶225,702; USTR ¶1214; .

RIA observation: For purposes of the Code Sec. 121 home-sale exclusion, property used as the taxpayer's principal residence may include a condominium, co-op, houseboat, or house trailer. See FTC 2d/Fin ¶I-4523; TaxDesk ¶225,703; USTR ¶1214; .

Purchase.

The term “purchase” means any acquisition, but only if (Code Sec. 36(c)(3)(A) ) :

... the property isn't acquired from a person related to the person acquiring it. (Code Sec. 36(c)(3)(A)(i) ) Persons are “related” if their relationship would result in the disallowance of losses under Code Sec. 267 (disallowance of losses in transactions between related persons, see FTC 2d/Fin ¶I-3500; TaxDesk ¶227,901; USTR ¶2674; ) or Code Sec. 707(b) (disallowance of losses between a partner and a partnership, see FTC 2d/Fin ¶B-2016; TaxDesk ¶584,514; USTR ¶7074; ). However, in applying Code Sec. 267(b) and Code Sec. 267(c) for this purpose, an individual's family includes only his spouse, ancestors, and lineal descendants. (Code Sec. 36(c)(5) )

RIA observation: Thus, for purposes of the above rule, brothers and sisters aren't considered family members, and a purchase that would otherwise qualify the first-time homebuyer for the credit won't be disqualified merely because the property was acquired from a sibling.

... the property's basis in the hands of the person acquiring it isn't determined in whole or in part by reference to the property's adjusted basis in the hands of the person from whom acquired. (Code Sec. 36(c)(3)(A)(ii)(I) )

RIA observation: Thus, a taxpayer may not claim the credit if he acquired the property by gift. The basis of property acquired by gift is the same as it would be in the hands of the donor for purposes of determining gain and depreciation, see FTC 2d/Fin ¶P-3103; TaxDesk ¶215,002; USTR ¶10,154; . If a transfer is in part a sale and in part a gift (i.e., a bargain sale), the transferee's basis is the greater of (1) the amount the transferee paid for the property or (2) the transferor's adjusted basis at the time of the transfer, see FTC 2d/Fin ¶P-3113; TaxDesk ¶215,006; USTR ¶10,154; .

... the property's basis in the hands of the person acquiring it isn't determined under Code Sec. 1014(a), relating to property acquired from a decedent, see FTC 2d/Fin ¶P-4001; TaxDesk ¶215,501; USTR ¶10,144; . (Code Sec. 36(c)(3)(A)(ii)(II) )

RIA observation: Thus, a taxpayer may not claim the credit if he acquired the property by inheritance.

A residence that the taxpayer constructs is treated as purchased by the taxpayer on the date the taxpayer first occupies it. (Code Sec. 36(c)(3)(B) )

RIA observation: Thus, a first-time homebuyer can claim the credit for a principal residence that he constructs if the taxpayer first occupied the home after April 8, 2008, and before July 1, 2009.

Purchase price.

The term “purchase price” means the principal residence's adjusted basis on the date it is purchased. (Code Sec. 36(c)(4) )

RIA observation: The basis of purchased real property includes such items as legal fees, title search, revenue stamps, and recording fees, see FTC 2d/Fin ¶P-1102; . Real property taxes that are treated under the Code Sec. 164(d) apportionment rule as imposed on the seller but are paid by the buyer are treated as part of the cost of the property, see FTC 2d/Fin ¶P-1174; TaxDesk ¶211,137; .

Credit unavailable in certain cases.

A taxpayer isn't allowed a credit for a tax year for the purchase of a residence if (Code Sec. 36(d) ) :

... a D.C. first-time homebuyer credit under Code Sec. 1400C is allowable to the taxpayer or the taxpayer's spouse for the tax year the residence was purchased or any earlier tax year (Code Sec. 36(d)(1) ) ;

... the residence is financed by the proceeds of a qualified mortgage issue the interest on which is tax-exempt under Code Sec. 103, see FTC 2d/Fin ¶J-3180; USTR ¶1434.01; (Code Sec. 36(d)(2) ) , i.e., by tax-exempt mortgage revenue bonds (Com Rept, see ¶5026) ;

... the taxpayer is a nonresident alien (Code Sec. 36(d)(3) ) ;

... the taxpayer disposes of the residence before the close of the tax year in which it was purchased (Code Sec. 36(d)(4) ) ; or

... the residence ceases to be the taxpayer's principal residence (and, if married, the principal residence of the taxpayer's spouse) before the close of the tax year in which it was purchased. (Code Sec. 36(d)(4) )

Recapture of credit.

If a taxpayer is allowed a first-time homebuyer credit, the taxpayer's tax is increased by 6 2/3% of the amount of the credit for each tax year in the recapture period. (Code Sec. 36(f)(1) ) The “recapture period” is the 15 tax years beginning with the second tax year following the tax year in which the principal residence was purchased. (Code Sec. 36(f)(7) )

RIA observation: The credit is recaptured over 15 years in equal installments. (Summary of H.R. 3221, Housing Assistance Tax Act of 2008, July 21, 2008) Thus, 6 2/3% is equal to one-fifteenth of the credit.

RIA illustration 8: Taxpayer, a first-time homebuyer, purchases a home for $100,000 in 2008. A $7,500 credit is allowed on the taxpayer's 2008 tax return. Recapture begins with the taxpayer's 2010 tax return.

The taxpayer must pay an additional tax of $500 ($7,500 × 6 2/3%) for each of the 15 years 2010–2024, unless recapture is accelerated or one of the exceptions to recapture applies, see below.

Acceleration of recapture.

If a taxpayer disposes of the principal residence before the end of the recapture period, the taxpayer's tax for the year of disposition is increased by the excess of the credit allowed over the amount recaptured in previous years (“accelerated recapture”). (Code Sec. 36(f)(2)(A) ) No further recapture is required. (Code Sec. 36(f)(2)(B) ) Accelerated recapture is also required in the year in which the residence ceases to be the taxpayer's principal residence and, if the taxpayer is married, the principal residence of the taxpayer's spouse. (Code Sec. 36(f)(2) )

RIA illustration 9: The taxpayer in Illustration (8) sells his home for $120,000 in 2012. He has no adjustments to basis.

The taxpayer must pay an additional tax of $6,500 for 2012. That is the excess of the $7,500 credit allowed over the $1,000 previously recaptured, $500 in 2010 and $500 in 2011.

Accelerated recapture limited to amount of gain.

If the principal residence was sold to a person who is not related to the taxpayer, the amount of accelerated recapture is limited to the amount of gain (if any) on the sale. (Code Sec. 36(f)(3) ) For the definition of “related persons,” see above under “Purchase.”

Solely for this purpose, gain is determined by reducing the residence's adjusted basis by the amount of the credit not previously recaptured. (Code Sec. 36(f)(3) )

RIA observation: This basis reduction means that if the taxpayer breaks even on the sale (before applying the basis reduction) or sells at a gain, the entire credit will be recaptured. Only if the sale is at a loss will the taxpayer avoid recapture of some or all of the credit.

RIA illustration 10: The taxpayer in Illustration (8) sells his home to an unrelated person for $98,000 in 2012. He has no adjustments to basis.

To determine the amount of gain for recapture purposes, the taxpayer's $100,000 basis is reduced to $93,500 by the $6,500 credit not previously recaptured. His gain for this purpose is $4,500 ($98,000 amount realized minus $93,500 basis). Taxpayer must pay an additional tax of $4,500 for 2012.

RIA observation: The remaining $2,000 of unrecaptured credit is never recaptured.

No recapture after taxpayer's death.

Neither regular nor accelerated recapture is required in any tax year ending after the date of the taxpayer's death. (Code Sec. 36(f)(4)(A) ) Thus, no amount is recaptured after a taxpayer's death. (Com Rept, see ¶5026)

Involuntarily conversions.

Recapture isn't accelerated if the residence is compulsorily or involuntarily converted (within the meaning of Code Sec. 1033(a), see FTC 2d/Fin ¶I-3701; TaxDesk ¶229,701; USTR ¶10,334; ) and the taxpayer acquires a new principal residence during the two-year period beginning on the date of the disposition of the residence or its cessation to be the taxpayer's principal residence. (Code Sec. 36(f)(4)(B) )

RIA illustration 11: The home purchased by the taxpayer in Illustration (8) is destroyed by a flood in 2012. The taxpayer purchases a new home in 2013.

No accelerated recapture is required as a result of the involuntary conversion in 2012. Instead, the regular recapture of $500 per year continues during the recapture period.

RIA observation: If the taxpayer in Illustration (11) hadn't replaced the involuntarily converted home within two years, accelerated recapture would apply because the home would have ceased to be the taxpayer's principal residence.

Accelerated recapture applies to the new principal residence during the recapture period as if the new principal residence were the converted residence. (Code Sec. 36(f)(4)(B) )

RIA illustration 12: The taxpayer in Illustration (11) sells the replacement home in 2015. Accelerated recapture would apply to the unrecaptured credit in 2015.

Transfers between spouses or incident to divorce.

Accelerated recapture isn't required in the case of a transfer of a residence to which Code Sec. 1041(a) applies, i.e., transfers between spouses and between former spouses incident to a divorce, see FTC 2d/Fin ¶I-3601; , FTC 2d/Fin ¶I-3609; TaxDesk ¶228,201; , TaxDesk ¶228,301; USTR ¶10,414; . (Code Sec. 36(f)(4)(C)(i) )

For tax years ending after the transfer, regular and accelerated recapture will apply to the transferee as if the transferee were the transferor. Recapture won't apply to the transferor. (Code Sec. 36(f)(4)(C)(ii) ) Thus, the transferee spouse (and not the transferor spouse) will be responsible for any future recapture. (Com Rept, see ¶5026)

RIA illustration 13: H and W, first-time homebuyers, purchase a principal residence for $100,000 in 2008 and claim a $7,500 credit. They recapture $500 of the credit in 2010 and $500 in 2011.

In 2012, H and W divorce and the residence is transferred to W incident to the divorce. No accelerated recapture is required as a result of this transfer.

For 2012 and later years, W is liable for the recapture tax on the residence. If W later disposes of the residence during the recapture period, she will be liable for the accelerated recapture.

RIA observation: In negotiating a divorce settlement, the transferee spouse's future liability for the recapture tax should be taken into account.

Joint returns.

If the credit was allowed on a joint return, half of the credit is treated as having been allowed to each individual filing the return for recapture purposes. (Code Sec. 36(f)(5) )

RIA illustration 14: Assume that H and W in Illustration (13) sold their home to a third party in 2012. Because half of the credit is treated as having been allowed to H and half to W, each is liable for half of the accelerated recapture tax triggered by the sale.

Return must be filed to report recapture tax.

A taxpayer who is liable for the recapture tax for a tax year must file an income tax return for that year, even if not otherwise required to file. (Code Sec. 36(f)(6) )

Recapture tax not offset by nonrefundable credits.

Recapture of the first-time homebuyer credit isn't included in the taxpayer's “regular tax liability” for purposes of the tax liability limitation on nonrefundable personal tax credits, see FTC 2d/Fin ¶L-18101; TaxDesk ¶569,601; USTR ¶264; . (Code Sec. 26(b)(2)(W) as amended by 2008 Housing Act §3011(b)(1))

RIA observation: Thus, the recapture tax can't be offset by the taxpayer's nonrefundable personal credits.

RIA illustration 15: In 2012, a taxpayer has $5,000 of income tax liability, $6,500 of recapture tax, and $7,000 of nonrefundable personal credits. The taxpayer can use $5,000 of the credits to offset the $5,000 of income tax, but can't offset the recapture tax with the remaining $2,000 of credits.

Information reporting.

In order to verify taxpayers' eligibility for the first-time homebuyer credit, IRS may require information reporting by “real estate reporting persons” of the gross proceeds from real estate transactions under Code Sec. 6045 (see FTC ¶S-3800; TaxDesk ¶814,040; USTR ¶60,454; ). If IRS does require this reporting, the exception under Code Sec. 6045(e)(5) for sales and exchanges of a principal residence for $250,000 ($500,000 if the seller is married) or less (see FTC ¶S-3815.1; TaxDesk ¶814,044; USTR ¶60,454.04; ) won't apply. (Code Sec. 36(e) )

Credit treated as negative tax in deficiency computation.

Any excess of the first-time homebuyer credit over the income tax is taken into account as a negative amount of tax in computing a taxpayer's tax deficiency. (Code Sec. 6211(b)(4)(A) as amended by 2008 Housing Act §3011(b)(2)) For how deficiencies are computed, see FTC 2d/Fin ¶T-1501; TaxDesk ¶822,501; USTR ¶62,114; .

Effective: Principal residences purchased by the taxpayer after April 8, 2008, in tax years ending after that date (2008 Housing Act §3011(c)) , regardless of whether there was a binding contract to purchase before April 9, 2008. (Com Rept, see ¶5026)

The credit won't be allowed for principal residences purchased by the taxpayer after June 30, 2009. (Code Sec. 36(h) )

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