First-Time-Home-Buyer-Tax-Credits
Document Sample
NuCompass Mobility 2011
The economic conditions of the past few years are surfacing new issues in the
mobility industry. One such situation is inquiries from relocating employees about
the potential tax impact of a move for homeowners who took the First Time Home
Buyer Tax Credit. Employees are concerned about having to pay back the credit
“ Beforeemployeesto
assist
deciding
taken on a prior year tax return if they move.
This is a new issue, and there is little benchmark data to guide employer
decision-making. NuCompass Mobility offers the following information for
consideration in policy development and responding to employee queries.
affected by this
issue, corporations
must determine In 2008, in an effort to stimulate the real estate market, Section 36 of the Internal
“ Revenue Code was added by the Housing and Economic Recovery Act of 2008 to
the intent of their provide a tax credit for First Time Home Buyers. The program was subsequently
policies. amended and extended by the American Recovery and Reinvestment Act of 2009
to include purchases prior to December 1, 2009.
The subsequent Worker, Homeownership, and Business Assistance Act of 2009
expanded the program to a broader population (i.e., “move up” buyers) and
extended the time frame to allow for purchases through July 1, 2010 to be eligible
for the credit. Congress later extended the deadline for closing of eligible purchases
to September 30, 2010.
Although some additional bills have been introduced, there is currently no
known activity in Congress to expand or extend the credit. See Exhibit 1 for a
detailed description of both programs.
Employees who purchased homes over the past few years and took the credit, and
who are now being asked to relocate by their employers, are asking their
employers to bear the cost of repayment of tax credits forfeited as a result of
moving.
It is not known what the size of the affected population may be, as employers
typically will not know whether an employee was a first-time buyer who took the
credit until the relocation discussion is in progress.
The potential cost per employee is the maximum tax credit amount of $8,000,
plus any tax assistance.
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2008 Home Purchases
For employees who purchased homes in 2008, the relocation-related impact is not
financial; it is a matter of timing. Based on the program parameters, the “credit” was
really a loan, and is required to be repaid over time. The repayment will be
accelerated by relocation and either sale or change of residence. There is no
relocation-related increase in tax liability to this population.
2009/2010 Home Purchases
For employees who purchased homes in 2009 or 2010, there is a potential increase
in tax liability that will result from recapture of the credit upon change of residence
within the three years following purchase. As noted above, the amount to be repaid
is the amount of the credit taken, limited to the amount of any gain on the sale of
the home. In the current real estate market, it is possible that employees who
purchase a home and sell it within the three year window will not realize a gain,
particularly once purchase closing costs and any capital improvements are added to
the purchase price.
The Modified Adjusted Gross Income (MAGI) ceiling may limit the population of
relocating employees who would qualify to take the credit. Transferee populations
often include mid- to upper-range income levels; in some instances, spouse income
will push the MAGI above the qualifying threshold, and the transferee would be
eligible for less than the full credit, or no credit at all. A purchase in a year in which
relocation occurred, which would presumably add taxable relocation payments to
income, could also reduce or eliminate eligibility for the credit. (This is subject to
the homeowner’s ability to claim the credit by filing an amended return for the
prior tax year).
There are several opportunities for a relocating employee to request additional tax
protection from their employer. Some of these, such as Alternative Minimum Tax,
raise considerations broader than the typical intent of a relocation tax assistance
policy. Employers must recognize the intent of their relocation program, and avoid
setting precedents that will open additional topics for discussion.
Unless an employer has a policy designed to keep employees “whole” with
regard to tax liability resulting from relocation, NuCompass Mobility recommends
that employers should not compensate for this expense, regardless of the timing of
the employee’s purchase.
Employers should prepare to address this question by first making a
determination whether the company will assist by absorbing this cost, either as a
matter of policy or on an exception basis. If the company determines that no
assistance will be provided, relocation policies should be updated to include content
to that effect.
2008 Home Purchases
Employees who purchased homes in 2008 should not be eligible for assistance, as
the program required repayment of the credit over a period of 15 years. These
employees will have a repayment obligation upon relocation, regardless of whether
they have been in the home for three years or longer, until the credit is repaid in full.
Any reimbursement of the repayment would essentially create a “windfall” to the
employee. For these employees, the impact is not an increased liability; it is an
accelerated repayment of an existing obligation unrelated to relocation.
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2009/2010 Home Purchases
Employees who purchased homes in 2009 and 2010 and took the tax credit received
a cash benefit upon filing their return. This might be equated to a loan, which is
being forgiven over a three year period. If the employee is relocated before the end
of the forgiveness period, they are required to repay this “loan”, under the terms
and conditions of the program. An employer would not typically assist an employee
to repay encumbrances like a home equity loan or line of credit, and this tax credit
can be viewed as such.
In addition, depending on the circumstances and location, if the employee were
to sell their home within three years of purchase, under the current economy, they
might avoid the repayment obligation, either by incurring a loss or by not having a
gain at the time of sale.
Relocated employees who purchased homes in 2009 and 2010 may choose not
to sell their homes. As a result of the home ceasing to be their primary residence,
they will likely trigger a repayment obligation. If they sell their home, their
repayment obligation would be limited to the amount of any gain, including
purchase closing costs and any qualifying capital improvements.
If the employee makes a personal decision not to sell, and either vacancy or
conversion of the home to a rental is the trigger for the repayment obligation, it
should be determined whether the employee could have avoided repayment by
selling. If so, employers should carefully consider whether the cost of the repayment
would have been avoided, either in whole or in part, by selling at a loss, or with no
gain realized.
In the event the company decides to assist employees affected by this issue, either
by policy or by exception, NuCompass Mobility makes the following
recommendations:
• Employers should provide the assistance by reimbursing the employee for the
actual additional tax upon filing of the tax return in which the additional tax was
incurred; the amount repaid might be less than the full credit, depending on the
sale price. The employee will ‘incur’ the tax at the time of filing.
• Employers should determine whether this reimbursement will be tax assisted,
consistent with the company relocation policy.
• Employees who purchased homes in 2009 and 2010 and sell their homes within
three years of purchase as a result of relocation should be counseled to be
prepared to provide the following documentation to support their request:
o Copy of the tax return and Form 5405 to document the First Time Buyer Tax
Credit
o Copy of the Settlement Statement for the home purchase qualifying for the
credit
o Copies of any receipts for any qualifying capital improvements
o Copy of the Settlement Statement for the sale of the property
o Copy of the tax return and Form 5405 detailing the repayment for the year
the home was sold or ceased to be the employee’s primary residence
If the employer assists with the repayment obligation, the net effect is that the
employee will have more cash/equity to invest in their next home, which carries
forward the original intent of the tax credit.
NuCompass Mobility recommends that any payments or reimbursements for
this obligation should subject to a requirement to purchase at the new location. The
payment should be characterized and treated as a bonus.
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Please see Exhibit 1 on the following page.
For additional information, readers may wish to reference the following page on the
IRS website at http://www.irs.gov/newsroom/article/0,,id=204671,00.html.
Additional reference information is available at the Employee Relocation Council
website at www.worldwideerc.org. Some ERC content may be limited to ERC
members.
NuCompass Mobility
7901 Stoneridge Drive
Suite 390
Pleasanton, CA 94588
925.734.3434
Written by Cara Skourtis,
Vice President, Global Operations
www.nucompass.com 4
Program Details
The First Time Home Buyer credit is a tax credit for taxpayers who have not owned another principal residence at any
time in the three years prior to the date of purchase, and who purchase a new home after April 8, 2008 and prior to
the program deadline noted. The initial program was launched in 2008, and the program was modified for 2009/2010.
Homes purchased in 2008 are affected differently than homes purchased in 2009/2010.
2008 Home Purchases
• Qualifying: The home must be the primary residence. To receive the full credit, the home must cost $75,000 or
more. Purchases of homes for less than $75,000 will result in a smaller credit.
• Credit Amount: The credit is 10% of the purchase price of the home, with a maximum credit of $7,500 for purchases
in 2008. The credit is claimed by filing Form 5405 with the tax return, along with required back up documentation.
• Timing: Under the original program, buyers could only claim the credit when filing their tax return. In many
instances, this might be months after the money was needed to close on the new home. This provision was modified
for 2009/2010 purchases to stimulate purchase activity.
• Phase Out: The tax credit is subject to a Modified Adjusted Gross Income (MAGI) ceiling, with the credit beginning to
“phase out” at an MAGI of $75,000 for single tax payers and $150,000 for married taxpayers filing jointly. The credits
fully phase out at $95,000 and $170,000 MAGI, respectively.
• Repayment Requirement: For homes purchased in 2008, although described as a tax credit, the benefit was actually
a no-interest loan, subject to mandatory repayment provisions. The “credit” must be repaid in the form of additional
taxes over the 15-year period following purchase, starting with the second year of ownership (typically repaid at
$500 per year). If there is a change of residence status before this period, the full credit is repaid upon either the
sale of the property or when the property ceases to be the primary residence. All repayments are captured as
additional tax in the year in which the change of status occurs, and are reported and paid by submission of Form
5405 with the return.
2009/2010 Home Purchases
• Qualifying: The home must be the primary residence. To receive the full credit, the home must cost $80,000 or
more. Purchases of homes for less than $80,000 will result in a smaller credit. For purchases after November 6,
2009, it is availably only for homes costing $800,000 or less.
• Credit Amount: The credit is 10% of the purchase price of the home, with a maximum credit of $8,000 for purchases
in 2009 and 2010. The 2009 Worker amendment/extension added a provision for “move up” buyers, subject to
eligibility restrictions, with a maximum credit of $6,500. The credit is claimed by filing Form 5405 with the tax return,
along with required back up documentation.
• Timing: To address timing considerations, the program was modified to allow buyers to file an amended return for
the prior tax year in order to receive the benefit of the credit closer to the time of the purchase (but not prior to
closing). For example, after closing on a home purchase in May of 2009, a buyer could file an amended 2008 return
to receive a refund of 2008 taxes, in order to receive the cash benefit of the program closer to the time of purchase.
• Phase Out: The tax credit is subject to the MAGI ceiling, with the credit beginning to “phase out” at an MAGI of
$125,000 for single tax payers and $225,000 for married taxpayers filing jointly. The credits fully phase out at
$145,000 and $245,000 MAGI, respectively.
• Repayment Requirement: For homes purchased in 2009 and 2010, Congress eliminated the repayment requirement
if the taxpayer maintains the home as their primary residence for three years following purchase. The program
requires repayment of the tax credit only if the home ceases to be the primary residence in the 36 month period
following the purchase, regardless of whether the change in status is due to sale; there is no exception in the law for
changes due to relocation.
For 2009 and 2010 purchases, section 36(f)(3) limits the amount to be repaid to the amount of any gain on the sale of
home - IF the home is sold. The gain is determined by calculating the purchase price, less the tax credit, plus purchase
closing costs and qualifying capital improvements, and subtracting that amount from the sale price.
All repayments are captured as additional tax in the year in which the change of status occurs, and are reported and
paid by submission of Form 5405 with the return.
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