First-Time Home Buyer Federal Tax Credit
Last summer, Congress passed the Housing and Economic Recovery Act of 2008 which provided for a $7,500 tax credit for first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. Unlike most other tax credits that do not require repayment, the $7,500 has to be repaid over 15 years at $500 each year. On February 17, 2009, President Obama signed into law a new first-time tax credit replacing the one passed in 2008.
Under the American Recovery and Reinvestment Act of 2009 (“ARRA”), first-time homebuyers can now take advantage of an $8,000 tax credit or 10% of the home’s purchase price — which ever is lower. However, unlike the 2008 tax credit, taxpayers do not have to repay the new credit back to the federal government. The period in which a taxpayer can take advantage of this credit has also been changed to include home purchases that close between January 1, 2009 and November 30, 2009. A home purchased by a first-time home buyer will qualify for the credit as long as the home will be used as a principal residence and the buyer has not owned a home in the three years prior to the purchase. Note that the credit is phased out for taxpayers above a certain income level. Single filers with a modified adjusted gross income (“AGI”) between $75,000 and $94,999, and for married taxpayers filing jointly with an AGI between $150,000 and $169,999, will be eligible for a partial credit. Single and married taxpayers with an AGI at or above $95,000 and $170,000 respectively, are ineligible to receive the credit.
While this tax credit would normally be claimed on the taxpayer’s 2009 return (filed in 2010), individuals can immediately start benefiting from the credit by raising the number of exemptions listed on their W-4 form on file with their employer (see this withholding calculator available on the IRS website). By raising the number of exemptions, the taxpayer would receive more income each paycheck since a smaller amount would be taken out for federal income taxes. Taxpayers are cautioned when taking this approach. Penalties and interest can be assessed for not withholding enough in income taxes if the taxpayer opts not to make a first-time home purchase in 2009 and thus not use the tax credit.
Under the ARRA, first-time homebuyers in 2009 will benefit from the $500 increase to the credit in addition to not having to repay the credit. For homes purchased between April 9, 2008 and December 31, 2008, the tax credit remains at $7,500 and will have to be repaid over 15 years or in full when the house is sold.
Michigan Principal Residence Exemption (Homestead Exemption)
There is also some tax relief for Michigan homeowners who have moved into a new home and are still trying to sell their previous residence. Last year, the Michigan legislature amended the principal residence exemption for home sellers, allowing them to retain two principal residence exemptions – one for the current Michigan residence and one for the previous Michigan residence property still on the market. The additional exemption is allowed for up to three tax years. However, the following conditions must be met as to the previous residence:
- the property must be for sale,
- the property cannot be occupied or leased, and
- the property cannot be used for any business or commercial purpose.
Besides the tax savings for the seller, continuing the exemption on the previous residence also benefits the future buyer who will be able to take advantage of the principal residence exemption on the same home for the remainder of the tax year. If the seller does not apply for the exemption on the previous residence, a potential buyer may demand a reduction in the sale price or partial payment of future taxes to compensate for the higher tax.
Please note that in order to take advantage of the additional exemption on the previous residence, the home owner must file with the local tax authority a conditional rescission form on or before May 1 for the first year of the claim, and then annually submit the form by December 31 for every year the home remains for sale.
If you have any questions or need assistance regarding this or any other home sale and purchase issue, please contact one of our Michigan real estate attorneys.