What's New for 2008

First-Time Homebuyer Tax Credit

Up to $7,500 federal tax credit for first-time home buyers

There's a new, refundable tax credit of up to $7,500 for the purchase of a primary residence. The credit is available to first-time homebuyers. This tax credit has some novel features, so here's the details.

Amount of the Homebuyer Tax Credit

The tax credit is worth 10% of the purchase price of the home, with a maximum credit of $7,500. The credit is limited to $3,750 for married couples filing separate returns. The credit is also limited to the same $7,500 maximum for unmarried persons who purchase a residence together.

Qualifying as a First-Time Homebuyer

For the purpose of this tax credit, a first-time homebuyer is defined as someone who has not owned a primary residence in the three-year period ending on the date of purchasing the home.

Limited Time Period for Purchasing a Residence

The credit has a very limited life-span. Individuals will need to purchase a residence after April 9, 2008, and before July 1, 2009.

What's a Primary Residence

A primary residence is a residence in which an individual lives most of the time. A primary residence can be a house, condominium, co-operative apartment, houseboat, or mobile home.

Because the tax credit is for people who purchase their primary residence, individuals may qualify for the tax credit even if they own a vacation home or rental property as long as those properties were not their primary residence for at least three years preceding the purchase of their new home.

Income Phase-out Range

The credit is phased out for individuals with modified adjusted gross income between $75,000 and $95,000. For married couples filing a joint return, the phase out range is $150,000 to $170,000.

Modified AGI for the First-Time Homebuyer Credit

To determine if the tax credit is reduced or eliminated by the income phase-out range, individuals will need to determine their modified adjusted gross income. For the purposes of determining income eligibility for this credit, adjusted gross income is modified by adding back the following excluded income:

·         foreign earned income;

·         income from Guam, American Samoa, or the Northern Mariana Islands;

·         income from Puerto Rico.

When to Claim the Credit

The credit is fully refundable, meaning taxpayers will be able to obtain an additional federal tax refund of up to $7,500 even if they have no other tax liabilities. Taxpayers will be able to claim the credit on their 2008 tax return for homes purchased in 2008. For homes purchased in 2009, the IRS will allow the purchasers to file an amended 2008 return to claim the credit.

Repaying the First-Time Homebuyer Credit

The credit needs to be repaid in equal installments over 15 years. Unlike any other tax credit, the first-time homebuyer credit must be repaid over 15 years. The credit will works like this: you'll get your refund when you file the tax return. Then the credit will be repaid as an additional tax on your tax return for the next fifteen years. For the maximum $7,500 credit, this works out to annual repayments of $500 per year. As CCH notes in their tax briefing, this tax credit amounts to an interest-free 15-year loan for first-time homebuyers. The credit will also need to be repaid in full if the taxpayer sells the house within the fifteen-year repayment period. The credit also needs to be repaid in full if the property is no longer the taxpayer's primary residence. The credit will be disallowed if a taxpayer sells the house before the end of the same year in which the house was purchased

Canceled Mortgage Debt and Taxes

Qualifying under the Mortgage Forgiveness Debt Relief Act

 Mortgage debt may qualify to be excluded under a new tax law, the Mortgage Forgiveness Debt Relief Act. This law provides that certain types of mortgage can be excluded from taxes. This exclusion is important for people whose homes have been foreclosed, or who sold their house short, or who restructured their mortgage.

There are two types of mortgage debt in the tax code. There's acquisition debt and home equity debt. The distinction between the two impacts which exclusion may apply. Acquisition debt is debt whose proceeds were used to buy, build, or substantially improve a principal residence. Home equity debt is debt whose proceeds were not used to buy, build, or improve the residence.

Acquisition debt can be excluded from tax under the Mortgage Forgiveness Debt Relief Act. Home equity debt cannot be excluded under this new law. Instead, home equity debt may qualify under the insolvency or bankruptcy exclusions.

There is one further criteria as well. The house must have been used as a main home, which means it was the principal place of residence for the debtor. That means second homes, vacation homes, investment properties, or rental units will not qualify under this exclusion. Canceled debts for those properties may qualify, however, under the insolvency or bankruptcy exclusions.

How much debt can be excluded from tax? Canceled mortgage debt of up to $2 million (or $1 million is married and filing a separate return) can be excluded from income for the years 2007 through 2012.

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