The Homeowner Tax Credit– What It Is and Where It Is Headed

The Taxpayer Relief Act was a huge break for sellers of real estate back in 1997. Basically, Congress changed the tax laws so that a homeowner could exempt $250,000 in gains from the sale of the owner’s primary residence. This had outstanding tax benefits for sellers over the last ten years as properties seemed to exponentially increase in value and homeowners routinely sold homes for a profit. In fact, prior to the Taxpayer Relief Act of 1997, homeowners had little incentive to move out of their home into a smaller place because it would cost them too much money in capital gains tax.

However, the President and Congress have recently began hinting that they might roll back or repeal some of the tax benefits within The Taxpayer Relief Act of 1997. This talk stays somewhat under the radar because, presently, people are not routinely selling their homes for a profit. But my question is: “What happens when the market ticks up and this benefit is repealed or rolled back?” How will that affect our business?

The Taxpayer Relief Act
The rules are pretty simple and any good realtor should know them well. Essentially, a homeowner can sell a “primary residence” and keep the first $250,000 of profit tax free. If the homeowners are married and filing a joint tax return, the couple can keep the first $500,000 of profit tax free.

In order to be deemed a “primary residence” the home must 1) have been lived in by the seller for at least two of the last five years, 2) the seller and his/her spouse must not have collected this tax benefit within the last two years on a different home sale, and 3) the property must be residential (commercial properties are not eligible for this tax exemption). The seller need not have lived in the home for two consecutive years. Also, as long as a seller has not sold a “primary home” and taken this tax benefit within the last two years, the tax exemption can be claimed over and over again.

The rules were made more lenient in 2004 for sellers who have been deployed by the military, have had a major change in health, have been forced to move for work, or can demonstrate insurmountable hardship. In these special circumstances, the sellers do not have to show that they lived in the primary residence for two of the last five years. However, they still cannot collect the benefit if they already have done so on a different sale within the last two years.

The Proposed Change
Most business attorneys are aware that the current capital gains tax that individuals and businesses pay on “personal property” sales will rise in 2011 because of a “sunset provision” that was placed in the Tax Increase Prevention and Reconciliation Act of 2006. This means that the Act terminates on its own on January 1, 2011, and without an additional act of Congress, individuals and businesses will have to pay higher taxes on profits that they earn for selling certain assets next year. Generally, real estate sales are not included in this capital gains tax increase. However, as the debate has heated up about whether to save the current “personal property” capital gains tax rate, the President and many in Congress have taken a firm stand that they want “fairness” in tax paying. This has lead to a discussion about revisiting the capital gains tax structure, including a tax increase on the profits that individuals earn when they sell their real estate holdings.

In his 2008 debates with Hilary Clinton, then Senator Obama proposed changing the entire capital gains tax structure back to where it was prior to The Taxpayer Relief Act of 1997. This would have numerous affects. Most notably, the homeowner tax benefit would be rolled back and virtually eliminated. Prior to 1997, sellers were only entitled to a $125,000 capital gains credit – and that was only if the seller was 55 years old or older at the time of sale.

Some on Capitol Hill have recently argued that the homeowner tax credit should be reduced from a $250,000 credit for one seller and a $500,000 credit for married sellers to a blanket $125,000 credit regardless of whether the couple files jointly or separately. The White House has not taken an official stand since Mr. Obama became President. However, some notable leaders in Congress, including Chairman of the House Financial Services Committee Barney Frank and Senate Majority Whip Richard Durbin (both voted against the Taxpayer Relief Act of 1997), have recently suggested that the homeowner tax credit of 1997 should be on the table along with all other capital gains.

By Chris Moles
Brokerage Counsel
Intero Real Estate, Inc.

The (Not Just) First-Time Homebuyer Tax Credit

The (Not Just) First-Time Homebuyer Tax Credit, Expanded & Explained


By Gino Blefari
President and CEO, Intero Real Estate Services

After much speculation by the general populace (and the real estate industry) and much consternation by Congress, the much-anticipated extension of the First-Time Homebuyer Tax Credit has been passed.

Passed, not to mention greatly expanded.

Whether you’re in favor of or opposed to the credit, it’s now been made available to a host of Americans not included in the initial offering, so how can you take advantage of it? Let’s break it down, shall we?



The original tax credit, which was a part of the economic stimulus package put into effect in February 2009, was made available to first-time homebuyers (people who hadn’t owned a home for three or more years) and applied to home purchases that closed on or before November 30, 2009. With the passage of the expansion bill into law, that credit has been extended to purchases made by May 1, 2010 and that are closed prior to July 1, 2010 (that means escrow is closed, all papers signed and keys are in-hand on or before June 30th).

For first-time homebuyers, the credit amount, as it was in the original plan, remains at 10% of the purchase price, up to a maximum credit of $8,000. Originally, to be eligible for the credit, single (not married) purchasers could have an adjusted gross income (AGI) of no more than $75,000/year; married couples with an AGI of $150,000 or less were eligible. Under the new plan, singles with an AGI of up to $125,000 and married couples with an AGI of up to $225,000 are eligible.

For those of you who had previously been ineligible to claim the credit at all because you already owned a home, there may be good news for you. Under the new plan, homeowners who have lived in their homes for 5 consecutive years of the past 8 years are eligible to receive a credit toward a new home purchase. Meant to give a boost to “move-up” buyers, this credit amount can be 10% of the purchase price, up to $6,500. The income caps referenced above are the same.

If you’re a member of the Armed Services and were/will be deployed outside the United States for at least 90 days between December 31, 2008 - May 1, 2010, you may claim the credit until May 1, 2011 (with settlement all wrapped up before July 1, 2011).

One peculiarity of which it’s important to take note: even if you purchase a new home in 2010, you can claim the credit on your 2009 tax return. If you file for an extension of time to file your income taxes, or if you amend your already-filed 2009 tax return, you may include the tax credit (this would put the cash in your pocket much sooner than if you were to claim the credit on your 2010 tax return). Be sure, however, to take heed of the income limitations, as they apply to the year in which you claim the credit.

Finally, it’s important that you understand that if the purchase price of the home exceeds $800,000, no tax credit may be claimed, regardless of your income levels. The credit only applies to primary residences. Investment properties or vacation homes don’t qualify.

Whether the expansion and extension of this credit is the shot in the arm that the US Economy needs remains to be seen, but it’s here, it’s ready and, if you’re planning on purchasing a new home, you should most certainly take advantage of it. Talk to your Intero agent or consult your financial advisor to discuss how this affects YOU.

CONGRESS PASSES HOMEBUYER TAX CREDIT

Here's the latest intelligence from Real Estate Economy Watch.

Special Report

CONGRESS PASSES HOMEBUYER TAX CREDIT


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The House of Representatives voted overwhelmingly this afternoon to pass legislation containing an extension and expansion of the homebuyer tax credit, completing Congressional action and sending the tax credit to President Obama for his signature, possibly as early as tomorrow.
The $8,000 homebuyer tax credit for first-time buyers, due to expire in 25 days, will be extended through April 30 of next year and buyers will have an additional two months, until the end of June, to close. First-time buyers who are in process of making a purchase will no longer need to worry about qualifying for the $8,000 credit if they close after the November 30 deadline. The new legislation increases the income limit for couples with income up to $225,000, a nearly $55,000 increase above the level in existing law.

For the first time, the new legislation makes buyers who already own a home eligible for a credit. A $6,500 maximum credit will be available to existing homeowners who have lived in their current residence for five of the prior eight years. The legislation limits eligibility for the existing homeowner credit to homes worth $800,000 or less.


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