A taxpayer who is a first-time homebuyer is allowed a refundable credit equal to the 10% of the purchase price of the residence, not to exceed $7,500 ($3,750 for a married individual filing separately). A first-time homebuyer is a homebuyer who has not held a present interest in a primary residence in the three-year period ending on the date of purchase.
This credit applies for qualified home purchases on or after April 9, 2008, and before July 1, 2009. However, a special election allows the taxpayer to treat a residence purchased after December, 2008, as purchased on December 31, 2008, so that the taxpayer can claim the credit on the taxpayer's 2008 return. The credit phases out for individual taxpayers with modified adjusted gross incomes between $75,000 and $95,000 ($150,000 - $170,000 for joint filers) for the year of purchase.
Essentially, the credit amounts to an interest free loan. This is because the credit is recaptured over a fifteen-year period with no interest charged, beginning in the second year after the taxable year in which the home is purchased. For example, if the taxpayer purchases a home in 2008, the credit is allowed on the 2008 tax return, and the repayments begin with the 2010 return. If the taxpayer sells the home or ceases to use it as a principal residence, any remaining credit payment is due on the tax return for the year of the sale or cessation of use as a principal residence.
The taxpayer is not permitted to claim the credit if the taxpayer was or is eligible for the District of Columbia first-time homebuyer credit, the taxpayer's financing is from tax-exempt mortgage revenue bonds, the taxpayer is a nonresident alien, or if the taxpayer disposed of the residence before the close of the taxable year that the credit would otherwise be allowable.
Additional Standard Deduction for State and Local Real Property Taxes
Beginning with sales or exchanges after 2008, gain from the sale of a taxpayer's principal residence allocated to periods of nonqualified use is not excluded from income. A nonqualified use is any period after 2008 during which the residence is not used by the taxpayer, the taxpayer's spouse, or former spouse as a principal residence. The amount of the gain allocated to periods of nonqualified use is the gain times the ratio of the total period of nonqualified use to the total period of time the taxpayer owned the property.
There are exceptions for: (1) periods of nonqualified use after the last time the residence was used by the taxpayer, spouse, or former spouse as the principal residence; (2) temporary absences not to exceed two years due to a change in place of employment, health, or unforeseen circumstances; and (3) service in the uniformed services, Foreign Service, or as an employee of the intelligence community, not to exceed 10 years. As you know, the gain attributable to depreciation is not eligible for the exclusion for principal residence gain; and the 2008 Housing Act specifies that such gain is not taken into account in the determination of gain allocated to nonqualified use.
