Wednesday, January 21, 2009

HOW TO ALLOCATE THE 1ST TIME HOME BUYER CREDIT AMONG NON-RELATED OWNERS

In the Housing and Economic Recovery Act of 2008 Congress created a special refundable “credit” for first-time home buyers. Here is a review of the credit -
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* The credit is available to first-time home buyers only. A first-time home buyer is a buyer who has not owned a principal residence during the three-year period prior to the purchase. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

* The maximum credit amount is $7,500.

* The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009.

* Single taxpayers with Modified Adjusted Gross Income (MAGI) of up to $75,000 and married couples with MAGI of up to $150,000 qualify for the full tax credit. The amount of credit is phased-out as MAGI goes from $75,001 to $95,000 for singles and $150,001 to $170,000 for married couples.

* The tax credit is not really a “credit” – it is actually an interest-free loan that must be repaid over a 15-year period. Be advised - one of the items that will probably be in BO's economic stimulus package is a repeal of the requirement to pay back the credit - so it may end up really being a credit after all.
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The maximum credit of $7,500 is per property and not per person. When two or more unrelated individuals purchase a qualifying property the $7,500 must allocated between all of the owners.
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IRS Notice 2009-12 provides guidance on just how to allocate the credit. According to the notice taxpayers can allocate the credit in any manner they see fit among the eligible purchasers.
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The purchasers can allocate the credit all to one buyer (i.e. property purchased as personal residence by Taxpayers A, B, and C – they decide that Taxpayer A gets a $7,500 credit and Taxpayers B and C get no credit), or they can allocate the credit based on down payment, on ownership percentages, on MAGIs, or any other manner they agree upon. The amount of credit each taxpayer claims is the amount that particular taxpayer will have to repay during the recapture period.
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Please note that no credit can be allocated to a taxpayer who is not eligible, such as a taxpayer who has owned a principal residence during the past 3 years.
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Any amount that is allocated to a taxpayer who has an MAGI within the phase-out range or higher will be reduced under the method set forth in the Act. As a result purchasers may choose to allocate nothing to an individual with MAGI of more than $75,000 (if single). If all purchasers fall within the phase-out range the credit can be allocated to the purchaser(s) with the lowest MAGI.
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The unrelated purchasers can allocate the credit so as to maximize the combined amount (to make sure they get the full $7,500) – or to maximize the “refundable” amount. Or they can allocate the credit so that a purchaser (or purchasers) with a balance due are “off the hook”.
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As with any other situation when money is involved there is the potential for disaster. Unrelated purchasers should be very careful when determining how to allocate the credit. In my 37 years in “the business” I have often seen disputes over money destroy life-long friendships and family relationships.
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TTFN

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