One of the major areas affecting individual taxpayers in the American Recovery and Reinvestment Act of 2009 was in the first-time homebuyer credit. Subject to certain restrictions and timing, the credit has been increased from $7,500 to $8,000 and the recapture rules relaxed. I am including below excerpts from the analysis of the section of the law from Thomson Reuters / RIA. The relevant Internal Revenue Code Sections are included as references. Please feel free to contact me if you have questions or want to discuss the applicability of this law to your situation.

Perry P. Gambrell, Jr.
CPA

Changes to first-time homebuyer credit are signed into law. 
An individual who is a first-time homebuyer of a principal residence in the U.S. after Apr. 8, 2008 and, under pre-2009 Recovery Act law, before July 1, 2009 is allowed, subject to an income phase-out, a refundable tax credit for 10% of the purchase price, up to a maximum of $7,500 ($3,750 on a separate return). The credit is allowed for the tax year in which the taxpayer purchases the home unless the taxpayer makes an election as described below.

Two credit recapture rules generally apply. Under a “regular recapture rule,” the credit is recaptured ratably over 15 years with no interest charge, beginning in the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax equal to 6-2/3% of the amount of the credit. 

Under an “accelerated recapture rule,” if the taxpayer sells the home, or the home ceases to be used as the principal residence of the taxpayer or the taxpayer’s spouse, before the complete repayment of the credit, any remaining credit repayment amount is due on the tax return for the year in which the home is sold or ceases to be used as the principal residence. The credit repayment amount can’t exceed the amount of gain from the sale of the residence to an unrelated person.

However, neither the regular nor accelerated recapture rule applies in any tax year ending after the taxpayer’s death. In the case of an involuntary conversion of the home, recapture isn’t accelerated if a new principal residence is acquired within a two-year period. And in the case of a transfer of the residence to a spouse or to a former spouse incident to a divorce, the transferee spouse—and not the transferor spouse—will be responsible for any future recapture. Under pre-2009 Recovery Act law, there were no other exceptions to the credit recapture rules. 

A taxpayer can elect to treat a home purchased during the eligible period in 2009 as if purchased on Dec. 31, 2008 for purposes of claiming the credit on the 2008 tax return and for establishing the beginning of the recapture period. Under pre-2009 Recovery Act law, this election applied for all first-time homebuyer credit purposes except the Code Sec. 36© definitions (i.e., the definitions for first-time homebuyer, principal residence, purchase, purchase price, and related persons, and the eligible period ended on June 30, 2009. 

Under pre-2009 Recovery Act law, the credit couldn’t be claimed if the purchase of the residence was financed by tax-exempt mortgage revenue bonds. 

New Law. Under the 2009 Recovery Act, the first-time homebuyer credit is extended to apply to principal residences purchased before Dec. 1, 2009. (Code Sec. 36(h) as amended by 2009 Recovery Act §1006(a)(1)) Correspondingly, for purposes of the election to treat the purchase of a principal residence as having been made on Dec. 31, 2008, the last date of purchase has also been extended until Nov. 30, 2009. (Code Sec. 36(g) as amended by 2009 Recovery Act §1006(a)(2))

The maximum amount of the credit is increased from $7,500 to $8,000. (Code Sec. 36(b) as amended by 2009 Recovery Act §1006(b)(1)) For married individuals filing separately, the maximum credit is increased from $3,750 to $4,000. (Code Sec. 36(b)(1)(B) as amended by 2009 Recovery Act §1006(b)(2))

Observation: The $8,000 maximum credit applies to taxpayers other than married individuals filing separately. That is, it applies to single filers and married couples filing joint returns.
Recapture rules.

The 2009 Recovery Act provides that for a principal residence purchased after Dec. 31, 2008 and before Dec. 1, 2009 for which a first-time homebuyer credit is allowed, the “regular recapture rule” won’t apply. (Code Sec. 36(f)(4)(D)(i) as amended by 2009 Recovery Act §1006©(1)) 

Observation: That is, recapture of the credit is waived for qualifying home purchases occurring during the period Jan. 1, 2009 through Nov. 30, 2009. This change transforms the credit from the equivalent of an interest-free loan (under pre-2009 Recovery Act law) into direct financial support for qualifying home purchases.
Also, for a principal residence purchased after Dec. 31, 2008 and before Dec. 1, 2009 for which a first-time homebuyer credit is allowed, the “accelerated recapture rule” will apply only if the taxpayer disposes of the residence, or the residence ceases to be the principal residence of the taxpayer or the taxpayer’s spouse, during the 36-month period beginning on the date of purchase of that residence by the taxpayer. (Code Sec. 36(f)(4)(D)(ii) ) 

Observation: Thus, if the taxpayer sells the home, or the home ceases to be used as the taxpayer’s (or the taxpayer’s spouse’s) principal residence within 36 months of purchase, the taxpayer will have to repay the credit. The repayment will be due on the tax return for the year in which the home is sold or ceases to be used as the principal residence. It’s not clear how the waiver of the “regular recapture rule” affects the “accelerated recapture rule” in this case. Presumably, because the taxpayer will not have made any ratable repayments during this up-to-36-month period, the entire amount of the credit (not to exceed the amount of gain from sale to an unrelated person) will have to be repaid at this time.

Election to treat purchase as made Dec. 31, 2008. 
The election to treat pre-Dec. 1, 2009 purchases as made in 2008 applies for all first-time homebuyer credit purposes, except the Code Sec. 36© definitions and the above new rules on waiver of recapture. (Code Sec. 36(g) as amended by 2009 Recovery Act §1006©(2)) In other words, the waiver of recapture applies without regard to whether the taxpayer makes an election to treat the pre-Dec. 1, 2009 purchase as occurring on Dec. 31, 2008. 

Qualified mortgage revenue bond financing permitted. 
The rule which prohibited the taking of the credit if the purchase of the residence was financed with the proceeds of qualified mortgage revenue bonds has been eliminated. (Code Sec. 36(d) as amended by 2009 Recovery Act §1006(e)) So, the purchase of a home may be financed with the proceeds of a mortgage revenue bond, i.e., a qualified mortgage issue the interest on which is tax-exempt under Code Sec. 103. 
Effective: Residences purchased after Dec. 31, 2008 (2009 Recovery Act §1006(f)) and before Dec. 1, 2009. (Code Sec. 36(h) )