Sometimes, being too quick to take advantage of a tax break from Congress can turn out to be a very bad thing.

Taxpayers who jumped aboard for the First-Time Homebuyer Credit when it was first enacted in 2008 may have been feeling a little sorry for themselves for a while now. First, the provision was modified in 2009 to increase the amount and eliminate the repayment obligation. Now, as those taxpayers who bought a home between April 9 and Dec. 31, 2008, face the start of their repayment obligation in 2010, the provision has been extended into 2010 and even further expanded.

It is not all good news, however, for those who waited. The provision was also amended to address some eligibility problems that appeared with claims of the credit on 2008 returns. As a result, taxpayers claiming the credit will in the future have to provide more evidence that they are actually entitled to it.

LONG-TERM RESIDENT CREDIT

The Worker, Homeownership, and Business Assistance Act of 2009 added, in addition to the $8,000 First-Time Homebuyer Credit, a $6,500 long-time resident credit. This credit is available to taxpayers who have owned and used the same home as a principal or primary residence for at least five consecutive years out of the eight-year period ending on the date of purchase of a new home as the primary residence.

This change should make a whole new group of taxpayers eligible for the credit, including taxpayers trading up to a larger home, taxpayers relocating to another area, and taxpayers downsizing in their retirement years. In addition, there does not appear to be any requirement to dispose of the old residence, as long as the new home becomes the primary residence of the taxpayer. Those with the wherewithal can convert their old residence into rental property, either permanently or at least temporarily until the market improves.

A new limit that applies both to taxpayers trading up and first-time homebuyers is that, after Nov. 6, 2009, the credit will not apply to a home valued at more than $800,000. Look for more homes to be offered within the $800,000 price range over the next few months, perhaps with separate negotiations available to purchase appliances or other personal property that might have in the past been included in the base purchase price. Buyers also should note that there is no proration of the credit if the purchase price is only a bit over the $800,000 level - it is an all-or-nothing, "cliff" limitation.

EXTENDED TIME

The homebuyer credit now applies to qualifying home purchases from Nov. 30, 2009, to April 30, 2010. One issue that came up in 2009 was whether the taxpayer could claim the credit in advance of actually closing on the home. The IRS answered this question in the negative, but the revised credit includes a provision that, if a binding contract is entered into by April 30, 2009, the taxpayer has until June 30, 2010, to close the purchase.

Just as an election was available for 2009 purchases to be claimed on the 2008 tax return, 2010 purchases may be claimed on the 2009 return.

INCOME LIMITS

For homes purchased after Nov. 6, 2009, the full credit is available to taxpayers with modified adjusted gross incomes of up to $125,000 ($225,000 for joint filers). The credit is completely phased out for MAGIs at or above $145,000 ($245,000 for joint filers). For homes purchased on or before Nov. 6, 2009, the phase-out range was MAGIs between $75,000 and $95,000 ($150,000 to $170,000 for joint filers).

One of the problems highlighted by the IRS on 2008 returns is that taxpayers with MAGIs in excess of the income limits were claiming the credit on their returns. Taxpayers who had closed by Nov. 30, 2009, as required under the old law, will still generally be subject to the old income limits. However, if the closing occurred after Nov. 6, 2009, the new income limits will apply. This is true even if the taxpayer elects to claim the credit on the 2008 returns. This new income range should open up both the First-Time Homebuyer Credit and the new long-term resident form of the credit to a host of new taxpayers.

NEW RESTRICTIONS

In addition to the purchase price cap of $800,000, the revised credit imposes several new restrictions designed to limit the availability of the credit to those that Congress had intended to benefit and to help the IRS enforce the credit requirements.

After Nov. 6, 2009, dependents are not eligible to claim the credit. Also, after Nov. 6, a purchaser must be at least 18 years of age on the date of purchase to claim the credit. The IRS reported that someone as young as four had claimed the credit on a 2008 return. In addition, the related-party restrictions are expanded to provide that the credit is not allowed if the taxpayer acquires the property from a person related to their spouse.

For tax years ending after Nov. 6, 2009, a copy of a properly executed settlement statement used to complete the taxpayer's purchase must be attached to a return claiming the credit. Taxpayers who claim the credit on an amended 2008 return - i.e., taxpayers who closed on or before Dec. 31, 2009, and make the election - would appear to be able to technically escape this requirement.

For tax years ending on or after April 9, 2008, the IRS is given the authority to treat as math or clerical errors, permitting tax assessments without following the usual deficiency procedures, the following situations arising in connection with the credit:

1. Any omission of additional tax owed because of the recapture of the credit;

2. Any claim for the credit if the IRS obtains information from the person issuing the taxpayer identification number of the taxpayer that indicates that the taxpayer does not meet the age requirement;

3. Information provided on a return for at least one of the two preceding tax years is inconsistent with eligibility for the credit (such as, reported income or, prior to Nov. 7, 2009, a mortgage interest deduction); and,

4. Failure to include an attached copy of the properly executed settlement statement.

Although the math-error provision relates back to any returns that would have been eligible to claim the credit since it was first enacted, the specific math-error criteria would appear only to apply to those returns for which that particular requirement had become effective.

GOV'T EMPLOYEE EXCEPTIONS

Members of the military, U.S. Foreign Service, and intelligence community who meet the definition of being on qualified official extended duty may qualify for a couple of exceptions. First, if the taxpayer claiming the credit disposes of the home or ceases to use it as a principal residence after Dec. 31, 2008, the recapture rules generally do not apply.

Second, for homes purchased after Nov. 30, 2009, if the taxpayer serves on qualified official extended duty service outside the U.S. for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May, 1, 2010, the credit termination dates are extended for one year. Thus, the taxpayer would have until April 30, 2011, to purchase a home, or, if a binding contract was entered into by that date, to close by June 30, 2011.

FORM 5405

The IRS is revising Form 5405 to reflect the recent changes. A taxpayer who purchases a home after Nov. 6, 2009, must use the new version of the form. Those claiming the credit on their 2009 returns, regardless of when the home was purchased, must also use the new version of the form. The IRS has also stated that those who claim the credit on their 2009 return will not be able to file electronically.

SUMMARY

Tax practitioners should make sure that their clients are familiar with the intricacies of the revised features of the homebuyer credit. Now in its third form, it is likely that taxpayers will have become somewhat confused as to the current requirements. Further, as the IRS has indicated, many taxpayers apparently made errors in determining their eligibility for the credit in its first two renditions.

Even though it appears so far that taxpayers have been rewarded for delaying action and waiting for further enhancements to the credit, it is never certain that those delays will be rewarded in the future, and we must assume that failure to act by April 30, 2010, could be fatal for claims of the homebuyer credit, except for qualified overseas government personnel.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst at CCH Tax and Accounting, a Wolters Kluwer business.

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