IRS Elaborates on First-Time Homebuyer Credit

January 21, 2009

In a recent Notice, the IRS has provided guidance to practitioners on how to allocate the first-time homebuyer credit between unmarried buyers of a principal residence. The credit (contained in I.R.C. §36) was created by the Housing and Economic Recovery Act of 2008 (which was signed into law on July 30, 2008) and provides that a first-time homebuyer may claim a credit equal to 10 percent of the purchase price of a principal residence purchased after April 8, 2008, and before July 1, 2009. The maximum credit amount is $ 7,500, and is phased-out for taxpayers with MAGI of $ 95,000 ($170,000 for married taxpayers filing a joint return). Importantly, the credit is not really a credit. Taxpayers generally must repay the credit over 15 years (a proposal is on the table to repeal this part of the law) although the repayment obligation may be accelerated or forgiven in some cases.

Note: For eligible purchases in 2008, a taxpayer claims the credit by attaching Form 5405, "First-Time Homebuyer Credit," to the taxpayer's 2008 tax return. For eligible purchases in 2009, a taxpayer may elect to claim the credit for 2008 or 2009 by attaching Form 5405 to the taxpayer's original or amended 2008
tax return or 2009 tax return.

As for principal residences purchased by unmarried buyers, IRS says that taxpayers claiming the credit may use any reasonable method to allocate the credit. That includes allocating the credit between taxpayers who are eligible to claim the credit based on (1) the taxpayers' contributions toward the purchase price of a residence as tenants in common or as joint tenants, or (2) the taxpayers' ownership interests in a residence as tenants in common. Here are the examples that IRS provides:

Example 1:

A contributes $ 45,000 and B contributes $ 15,000 towards the $ 60,000 purchase price of a residence. Each owns a one-half interest in the residence as tenants in common. Under I.R.C. §36(a), the allowable credit is limited to 10 percent of the purchase price, or $ 6,000. A and B may allocate the allowable $ 6,000 credit three-fourths to A and one-fourth to B based on their contributions toward the purchase price of the residence, one-half to each based on their ownership interests in the residence, or using any other reasonable method (for example, the entire credit to A or B because both A and B are eligible to claim the entire allowable credit).

Example 2:

A contributes $ 10,000 for a down payment towards the $ 100,000 purchase price of a residence, and A and B obtain and are jointly liable for a $ 90,000 mortgage for the remainder of the purchase price. Each owns a one-half interest in the residence as tenants in common. Under I.R.C. §36(b)(1)(A), the allowable credit is not $ 10,000 (10 percent of the purchase price) but is limited to $ 7,500. A and B may allocate the allowable $ 7,500 credit 55 percent to A and 45 percent to B based on their contributions toward the purchase price, one-half to each based on their ownership interests in the residence, or using any other reasonable method (for example, the entire credit to A or B because both A and B are eligible to claim the entire allowable credit).

Example 3:

On April 15, 2008, A pays the entire $ 100,000 purchase price of a residence and is the sole owner. Under I.R.C. §36(b)(1)(A), the allowable credit is not $ 10,000 (10 percent of the purchase price) but is limited to $ 7,500. On May 12, 2008, A transfers a one-half interest in the residence to B as a tenant in common for $ 10,000. A may claim the entire allowable $ 7,500 credit. Because B acquired B's interest in the residence from A in part by gift, B's basis in the residence is determined under I.R.C. §1015 by reference to A's basis in the residence. Therefore, B did not purchase an interest in the residence within the meaning of I.R.C. §36(c)(3), and no portion of the credit may be allocated to B because B is not eligible to claim any portion of the credit.

Example 4:

A and B each contributes $ 50,000 towards the $ 100,000 purchase price of a residence and owns a one-half interest in the residence as tenants in common. Under I.R.C. §36(b)(1)(A), the allowable credit is not $ 10,000 (10 percent of the purchase price) but is limited to $ 7,500. However, B is not a first-time homebuyer within the meaning of I.R.C. §36(c)(1). Therefore, no portion of the credit may be allocated to B because B is not eligible to claim any portion of the credit. A may claim the entire allowable $ 7,500 credit.

Example 5:

A contributes $ 75,000 and B contributes $ 25,000 towards the $ 100,000 purchase price of a residence, and each owns a one-half interest in the residence as tenants in common. Under I.R.C. §36(b)(1)(A), the allowable credit is not $ 10,000 (10 percent of the purchase price) but is limited to $ 7,500. A's MAGI is $ 100,000 and B's MAGI is $ 60,000. Because A's MAGI exceeds the $ 95,000 MAGI cap, any portion of the credit allocated to A would be reduced to $ 0. A and B may allocate the entire allowable $ 7,500 credit to B because B's MAGI is less than the $ 75,000 MAGI threshold and, therefore, B is eligible to claim the entire allowable credit.

Example 6:

A and B each contributes $ 50,000 towards the $ 100,000 purchase price of a residence and owns a one-half interest in the residence as tenants in common. Under I.R.C. §36(b)(1)(A), the allowable credit is not $ 10,000 (10 percent of the purchase price) but is limited to $ 7,500. A's MAGI is $ 80,000 and B's MAGI is $ 60,000. Because A's MAGI exceeds the $ 75,000 MAGI threshold by $ 5,000, any portion of the allowable credit allocated to A will be reduced by one-quarter, $ 5,000 (MAGI in excess of $ 75,000) / $ 20,000. A and B may allocate the allowable $ 7,500 credit one-half to A and one-half to B ($ 3,750 each) based on their contributions toward the purchase price of the residence or their ownership interests in the residence. However, A's $ 3,750 portion of the credit is limited by I.R.C. § 36(b)(2) and is reduced by one-quarter ($ 3,750 x .25 = $ 937.50) to $ 2,812.50 ($ 3,750 -- 937.50). Alternatively, A and B may allocate the allowable $ 7,500 credit using any other reasonable method (for example, the entire credit to B because B's MAGI is less than the $ 75,000 MAGI threshold and, therefore, B is eligible to claim the entire allowable credit).

Example 7:

A and B, who are sisters, each contributes $ 50,000 towards the $ 100,000 purchase price of a residence and each owns a one-half interest as tenants in common. Under I.R.C. §36(b)(1)(A), the allowable credit is not $ 10,000 (10 percent of the purchase price) but is limited to $ 7,500. A and B purchase the residence from their cousin, C. A, B, and C are not related persons within the meaning of I.R.C. §36(c)(5). Therefore, A and B may allocate the allowable $ 7,500 credit one-half to A and one-half to B based on their contributions toward the purchase price of the residence or their ownership interests in the residence. Alternatively, A and B may allocate the allowable $ 7,500 credit using any other reasonable method (for example, the entire credit to A or B because both A and B are eligible to claim the entire allowable credit).

The IRS guidance is provided in Notice 2009-12, 2009-6 IRB 1.