The Housing Assistance Tax Act of 2008 created a tax credit for first-time homebuyers who purchase a principal residence in the United States after April 8, 2008, and before July 1, 2009, and who did not have an ownership interest in a principal residence in the prior three years. The credit was later increased and extended to December 1, 2009, by the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) for purchases made after December 31, 2008.

As a result of changes by the 2009 Recovery Act, there are different recapture and repayment rules applicable to purchases in 2008 versus purchases in 2009.

If you purchased your home in 2008, the amount of the credit must be repaid. Although it was labeled as a credit, the first-time homebuyer credit actually amounts to a no-interest loan. The credit must be repaid in equal installments over 15 years, beginning in 2010. In addition, if before the end of the recapture period, you sell the home or you (and your spouse, if married) cease to use the home as a principal residence, the portion of the credit that has not yet been recaptured must be recaptured on the return for the year in which the sale occurs or the use as a principal residence ceases.

If you purchased your home in 2009, the recapture of the first-time homebuyer credit is generally waived as provided by the 2009 Recovery Act. However, an accelerated recapture rule applies to a home purchase if, within 36 months after the purchase, you dispose of the home or you (and your spouse, if married) cease to use the home as a principal residence. This means that if the house is sold or ceases to be used as a principal residence during that time period, the entire credit must be recaptured on the return for the year in which the sale occurs or the use as a principal residence ceases.

There are several different ways that you may claim the new first-time homebuyer credit for 2009 purchases. Pursuant to the 2009 Recovery Act, if you qualify, you may receive a credit of 10 percent of the purchase price of your home, up to $8,000 ($4,000 for married couples filing separately). The credit amount begins to phase out for taxpayers with modified adjusted gross income of $75,000 ($150,000 for joint filers).

In order to qualify as a first-time homebuyer, you (and, if married, your spouse) must not have had a present ownership interest in a principal residence during the three-year period ending on the date of the home purchase that qualifies for the credit.

According to an IRS news release, you may claim the $8,000 credit either on your 2008 or 2009 tax return. Therefore, if you are buying a home in the near future and have already filed your 2008 tax return, you should consider filing an amended 2008 tax return. Filing an amended 2008 return will allow you to claim the first-time homebuyer credit without waiting until you file your 2009 return. However, waiting to claim the credit may be beneficial if you will qualify for a higher credit in 2009 as a result of a phase-out of the credit in 2008 based on your modified adjusted gross income.

Regardless of when you claim the credit, the home must be purchased before December 1, 2009. In addition, you will be subject to the recapture rule. You must repay the entire amount of the credit if the home ceases to be your principal residence within 36 months from the date of the purchase.

If you have any questions regarding the first-time homebuyer credit and the recapture rules, please contact us. We will be happy to assist you.