$7,500 tax credit may be yours to keep

WASHINGTON — Should you give the $7,500 homebuyer tax credit a second look? Now that Congress may be on the verge of transforming it into a true tax credit — one that never has to be paid back — you just might want to do so.

On Jan. 15, the House Democratic leadership outlined its $825 billion economic stimulus package, loaded with $275 billion in tax cuts and $550 billion in new spending on health care, education, alternative energy and infrastructure improvements.

Tucked away in the tax section was a significant improvement to last July's congressional effort to stimulate home sales. That program offered a credit of up to $7,500 to purchasers who had never bought a house or hadn't owned one during the previous three years. To qualify, taxpayers would need to close on a house between April 8, 2008, and this coming July 1.

But relatively few consumers were attracted to the plan because unlike virtually all other federal tax credits, this one had to be repaid in full to the IRS over a 15-year period. In effect, the $7,500 was more like an interest-free installment loan from the government than a straightforward dollar-for-dollar reduction on buyers' tax bills.

Though final details on a revised credit are still subject to negotiations between the House and Senate — and to passage of the economic-stimulus package itself — there's a good chance that buyers who sought the credit in 2008, and new purchasers in 2009, will be relieved of the repayment requirement.

According to industry estimates, removing the repayment rule could lead to an additional 202,000 purchases this year. The National Association of Realtors is pushing for the July 1 deadline to be extended to Dec. 31, opening the door to even greater numbers of sales.

Meanwhile, the IRS has come out with two recent advisories on the credit, plus a new Form 5405 for taxpayers interested in claiming the $7,500 benefit, either for 2008 or 2009. You can download a copy of the form at www.irs.gov in the publications and forms section.

Based on the latest IRS guidance, here's what you need to know if you're thinking about buying a house this year — taking advantage not only of low prices and record low mortgage rates, but a temporary tax credit that may well turn out to be nonrepayable:

• The $7,500 is available to singles, married couples filing jointly and unmarried co-purchasers, provided they meet the non-ownership test for the previous three years. Married couples filing singly can claim up to $3,750 each. Unmarried individuals can allocate the credit on their filings according to their respective ownership shares or capital investments in the house.

• Only principal residences — or in the IRS' words, "the one you live in most of the time" — are eligible. No second homes, investment properties or houses located outside the United States pass the test. However, the definition of "home" extends far beyond conventional houses sited on lots. It "can be a ... houseboat, house trailer, co-op apartment, condominium or other type of residence," according to Form 5405. For example, if you buy a sailboat or powerboat with full living facilities, tie it up at a marina, and make it your "main home," you should be eligible to claim the credit, though you may want to run all the specifics of your situation by your accountant or tax adviser.

• Even if it's your first home purchase, you are not eligible if your adjusted gross income is above $95,000 (single filer) or $170,000 (married joint filers). Married couples with incomes between $150,000 and $170,000 are eligible for reduced credits, based on a phaseout schedule. Single filers with incomes between $75,000 and $95,000 also are subject to reduced credit limits. Taxpayers who use tax-exempt mortgage bonds issued by state or local governments to finance home purchases also are ineligible.

• You can't claim the $7,500 credit if you buy your house from a "related person," meaning a spouse, parents, grandparents, children or a corporation or partnership where you own more than 50 percent of the stock or capital interests.

If you pass all these tests, and get the purchase done by whatever deadline date Congress decides as part of the final stimulus package, you should be able to take $7,500 off your federal tax bottom line, and not worry about ever paying it back.

Kenneth R. Harney: kenharney@earthlink.net

Information in this article, originally published Jan. 24, 2009, was corrected Jan. 25, 2009. The second-to-last bullet point should convey that first-time homebuyers are not eligible if adjusted gross income is above $95,000 for a single filer or $170,000 for married joint filers.