First-Time-Home-Buyer-Tax-Credits by fanzhongqing

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									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.

                          -continued-
                    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.

                    -continued-

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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.

                    -continued-

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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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