IRS clarifications on tax credit…

Oh what webs we weave. From the National Association of Home Builders Web site came this short piece. The IRS has “clarified” its position on two scenarios that have arisen with the extension of the first-time home buyer tax credit and creation of the new repeat home buyer tax credit. With the addition of the second tax credit, there may now be a situation in which two unmarried buyers purchase a residence together where one qualifies for the $6,500 repeat buyer credit and the other qualifies for the $8,000 credit. According to the IRS, they must allocate the tax credit in a reasonable manner. The repeat buyer cannot receive a tax credit higher than $6,500 and the total amount claimed by both buyers cannot exceed $8,000. For example, the repeat home buyer could claim $6,500 and the first-time home buyer could claim $1,500. Alternatively, both buyers could claim a $4,000 tax credit.

That all sort of makes sense. After all, we wouldn’t want both people making claims on the same house, but what do want to bet that that won’t happen? After all there were apparently hundreds of claims for the original tax credit files by people who never bought anything.The second scenario involves the qualification status of married purchasers as repeat home buyers. In order to qualify for the repeat buyer tax credit, both individuals must have lived in the same residence for five consecutive years out of the last eight. If one spouse has lived in the house for five years and the other moved in later, after they were married, then they are both excluded from the repeat buyer tax credit.

This information has been updated on NAHB's consumer tax credit Web site, which can be found at http://www.federalhousingtaxcredit.com/.

So, apparently you’d be better off to get a quickie divorce and be able to claim your tax credit if you (like so many do) moved in with a spouse after getting married and that was five years ago or less. I guess this all makes sense on some level, but for the most part if looks like it will just encourage more fraud as people lie about these things to claim the tax credit. Somehow it seems that the rule should be that one of the two married partners must have owned and lived in the house for the last five years. There is sure to be enough fraud and abuse attempted by investor-owners without worrying about a spouse who only moved in a few years ago.

Sometimes I believe that in order to be a good bureaucratic rules writer one must first attend the Joseph Heller School of Writing, perhaps with a major in obfuscation. I’ve actually tried to read the write-ups, rules and explanations of a few of the Federal programs for homeowners and homebuyers. It tends to cause headaches.

Come on along for the ride…

Congress passed and the President signed the law extending the first-time tax credit until next June 30th. They also threw in a $6,500 carrot for people who were not eligible for the original credit – current homeowners. The new $6,500 federal tax credit for so-called "move up" buyers took effect immediately upon enactment. That means that potentially hundreds of thousands of Americans who fit the key ownership and income criteria for the new credit are eligible for it … right now.

What are those tests?

Number one: You have to have owned and used your current home as your principal residence for five consecutive years out the past eight;

Number two: Your adjusted household annual income cannot exceed $125,000 if you file taxes as a single, or $225,000 if you are married filing jointly.

To qualify, you've got to sign a contract to purchase a replacement residence before next April 30, and go to closing on it by June 30, 2010.

In addition to the traditional move up buyers, this is great news for the thousands of baby boomers who were hoping to downsize in retirement. This tax credit may help take some of the sting out of the loss that many will have to take on their current homes.

This is also good news for the real estate industry. While first-time buyers have fueled a huge surge in the market, most of the homes that they are buying are starter homes or foreclosed and short sale properties at the lower end of the market. This new incentive may help fence sitters in the middle of the market take action to buy that next house. Many will have to sell their current home; so, that will add to the inventory at the lower end, giving the first-time buyers more choices.

This new incentive is likely to have the most impact in the middle of the country, where homes are more reasonably priced and incomes a bit lower, than on the coasts. That’s good news, since Middle America can use a break about now. The fact that it may help the battered baby boomer generation is good news too, although they still have to get out from under their McMansions in order to use the tax break.

For a FAQ from the National Association of Realtors on the new tax law, click here.