D.C. Homebuyer Tax Credit Is Now Alive And Well
The Working Families Tax Relief Act of 2004, signed by President Bush on Monday, October 4, 2004, contains three little words which will dramatically impact residential housing in the District of Columbia.
These words are "January 1, 2006".
The new law revived the first time homebuyer tax credit, which previously had expired on January 1, 2004. Let's look at how it works.
If you are buying your first home in the District of Columbia, and it will be your principal residence, you may be eligible a credit against your Federal taxes of up to $5,000. It makes no difference if you have owned -- or still own -- property anywhere else in the world. You may be eligible for the credit if this is your first home purchase in the District.
In fact, unlike similar State legislation which requires that you have never owned a house before, this law defines "first-time homebuyer" to mean:
Any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence in the District of Columbia during the 1-year period ending on the date of the purchase of the principal residence to which this section applies.
However, the law does state that a taxpayer can only take advantage of this credit "one-time only."
Let us first define the concept of "credit." Oversimplified, it will reduce the amount of tax you will have to pay by the amount of the credit. Look at Line 51 (b) of your 2003 income tax return (form 1040). There is a reference to IRS Form 8859 (entitled "District of Columbia First-Time Homebuyer Credit"). As you will see, the credit will reduce -- dollar for dollar -- a taxpayer's tax liability.
Who is eligible for this credit? According to the law, the home must be purchased between August 4, 1997 and January 1, 2006. There is no statutory definition of the word "purchased." Accordingly, unless the IRS or the Courts tell us differently, one would have to assume that this language means what it says: "purchased" and not "contracted for." In other words, you actually would have to settle on the house after August 4, 1997.
There are no restrictions on the amount of the purchase price, nor on the location (within the District) of the property. There are, however, income limitations.
Congress looked at the concept of "modified adjusted gross income" (AGI). AGI is a number that is between gross income and taxable income. You can find this number on Line 34 of your 2003 Income Tax 1040 Return. Modified AGI is your AGI plus any amount excluded from your income as a foreign earned income, or because the income came from such places as Guam, American Samoa, or from Puerto Rico.
You compute the credit as follows:
Joint tax filers -- you get the full credit until your modified AGI reaches $110,000. Then for every $1000 of modified AGI above this number, the credit is reduced by $250.00. Once your AGI exceeds $130,000, no credit may be taken.
Single tax filers -- you get the full credit until your modified AGI reaches $70,00. Then, for every $1000 of modified AGI above this number, the credit is reduced by $250.00. Once your AGI exceeds $90,000, no credit may be taken.
There is a simple formula you can use to compute the amount of your eligible tax credit:
($5,000 x Modified AGI) - $70,000 / $20,000
Note: the above formula is for a single tax filer; substitute $110,000 for $70,000 if you file a joint return. Also note that married taxpayers who file separately can only get up to $2,500 by way of this tax credit.
If two or more unmarried individuals purchase a principal residence, the law requires the Secretary of the Treasury to prescribe the method of allocating the tax credit; in no case, however, can it exceed a total of $5,000.
Although the concept is simple, the law is complex. Congress wanted to encourage taxpayers to move into the District and purchase a home here. If you are planning to purchase a house shortly, consult your tax and legal advisors before signing that purchase and sales agreement.
And, it is important to note that the law is retroactive back to January 1, 2004. So if you already purchased a house, condominium or cooperative apartment this year, you must remember to take advantage of this credit when you file your 2004 income tax next year.
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