Real Estate, Construction, & Development Industry Insight

	1st Quarter, 2010

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about the Author

Jackie has over 12 years of professional experience and serves as a Senior Tax Manager in the Denver office of HEIN & ASSOCIATES LLP. She provides both public and private companies in the real estate industry with a wide range of tax compliance and planning services, including tax research, FAS 109 deferred tax calculations, and income tax planning. Jackie has assisted clients in the areas of partnership structuring, consolidated tax returns, multi-state tax issues, and capital formation activities.

In addition to her real estate experience, Jackie has also developed a focus in the manufacturing, distribution, and technology industries. Prior to joining HEIN & ASSOCIATES LLP in 1999, she served as a Tax Senior for a local firm in the Midwest. Jackie received her bachelor of science in accounting from Arizona State University.

Jackie can be reached at 303.298.9600 or jnoland@heincpa.com.

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New Legislation Affects Homebuyer Tax Credit Rules

By Jackie Noland, CPA, Senior Tax Manager

On November 6, 2009, the President signed into law the "Worker, Homeownership, and Business Assistance Act of 2009." The new law extends and liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving rule. It also includes some provisions designed to prevent abuse of the credit. These important changes could make it easier for an individual or couple to purchase a home. In addition, because the changes in the Act generally assist buyers and aim to improve residential real estate markets nationwide, they also could make it easier for the homeowner to sell a home.

Homebuyer Credit Basic Rules. Prior to the new Act, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes purchased in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence’s purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies, and vacation homes and rental properties are not eligible. The homebuyer credit reduces an individual’s tax liability on a dollar-for-dollar basis, and if the credit is greater than the tax the individual owes, the difference is refundable. For homes purchased after December 31, 2008, the credit is recaptured if an individual disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase. Prior to the new law, the credit phased out for individuals with adjusted gross incomes (AGI) of between $75,000 and $95,000 ($150,000 and $170,000 for those filing a joint return) for the year of purchase.

Revised Homebuyer Credit Basics. The new law makes four general changes to the homebuyer credit:

The extension of the credit. The homebuyer credit is extended to apply to a principal residence purchased before May 1, 2010. The credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a binding written contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. Generally, a home is considered bought for credit purposes when the closing takes place. However, certain service members on qualified official extended duty service outside the U.S. receive an extra year to purchase a qualifying home and get the credit. They also may avoid the recapture rules under certain circumstances.
Credit available to "long-time residents." For purchases after November 6, 2009, an individual may claim the credit if the individual (and, if married, his/her spouse) maintained the same principal residence for any five consecutive year period during the eight years ending on the date that the subsequent principal residence is purchased. There is no requirement for the current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, an individual could purchase a replacement residence to beat the new deadlines before the old home is sold.
Credit available to higher income persons. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much larger pool of buyers. For individuals, the phase-out range is between $125,000 and $145,000, and for those filing a joint return it is between $225,000 and $245,000.
Home price limit. For purchases after November 6, 2009, the credit cannot be claimed for a home if its purchase price exceeds $800,000. It is important to note that there is no phase-out mechanism. A purchase price that exceeds the $800,000 threshold by even one dollar will cause the loss of the entire credit.

Other Changes. The anti-abuse rules referenced above include the following:

For returns for tax years ending after November 6, 2009, the credit cannot be claimed unless the individual attaches to the return an executed copy of the settlement statement used to complete the purchase of the qualifying residence.
For purchases after November 6, 2009, the credit cannot be claimed unless the individual has attained age 18 as of the date of purchase.
For purchases after November 6, 2009, the credit cannot be claimed by an individual if he/she can be claimed as a dependent by another taxpayer for the tax year of purchase. It also cannot be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if he/she is married.
For returns for tax years ending after April 8, 2008, the new law makes it easier for the IRS to pursue questionable homebuyer credit claims without initiating a full-scale audit.

One Final Item. The Act contains an additional provision that will be very important for those in the real estate business and others as well. This provision gives taxpayers an extended net operating loss (NOL) carryback period. The Act expands the extended carryback period to any taxpayer who incurred a NOL in a year ending in 2008 or 2009. The new extended carryback period is five years. Note that carrybacks to the fifth year are limited to 50% of taxable income and carrybacks to the prior four years are eligible to offset 100% of taxable income.

A number of aspects of prior law have not been changed by the new Act. It is important to recognize that prior law, and now this new Act, is quite technical and individuals are advised to seek advice to ensure the credit is available.