Two Unmarried People Purchase a Home — Who Gets the New $8,000 Homebuyer Tax Credit?

It’s all over the news. If you buy a home between January 1, 2009 and December 1, 2009, you could qualify for a big homebuyer tax credit.  It’s worth as much as $8,000 or 10 % of your home purchase price, whichever is less.

To be eligible, you can’t have owned a principal residence during the three years prior to purchase date and your adjusted gross income or AGI can’t be more than $95,000 ($170,000 if filing married joint). AGI is basically your taxable income before you subtract your standard or itemized tax deduction and exemptions.

In Live Community, we’re seeing lots of questions about who gets the tax credit if an unmarried couple (or siblings, fishing buddies, sorority sisters, etc.) buys a home in 2009. Let’s say the home’s price is $60,000. Since each person files a separate tax return, does each person get the $6,000 ($60,000 times 10%) credit? Nope!  There’s only one credit per home – but the buyers can divvy it up in many different ways.

The IRS says that the taxpayers can allocate the tax credit in any “reasonable” manner as long as they don’t give the credit to someone who is ineligible for the credit. Huh?

Let’s look at some of the possibilities.

Sam and Suzy have dated forever and decided it’s time to buy a $100,000 house.  It’ll be a first-time purchase for both of them.  The maximum credit for this home is $8,000.

Example 1: Sam plans to pay $30,000 and Suzy to pay $10,000 toward the down payment. They will both be jointly liable for the remaining $60,000 mortgage and have one-half interest in the home as tenants in common. Sam’s adjusted gross income (AGI) is $60,000 and so is Suzy’s.

Option 1: Based on contributions to the purchase, Sam could get 60% of the $8,000 credit or $4,800. Here’s how his 60% is figured:  $30,000 down payment + $30,000 mortgage share /$100,000 purchase price  = 60%.

Suzy could get 40% of the $8,000 credit  or $3,200. That’s $10,000 down payment + $30,000 mortgage share / $100,000 purchase price = 40%.

Note:  Sam’s $4,800 credit plus Suzy’s $3,200 credit equals $8,000.  The total of the credits can’t be more than $8,000.

Option 2: Based on their ownership interests, they could each get 50% of the $8,000 credit, or $4,000.

Option 3: 100% of the credit could go to either Sam or Suzy because both are eligible for the credit.

Example 2: Same as example 1 however Sam’s AGI is $100,000 and Suzy’s AGI $50,000.

Option 1:Since Sam’s AGI is greater than $95,000, he is not eligible for the credit so Suzy takes all of the credit.

Example 3: Same as example 1 however Sam owned a home from 2000 and sold it in 2007.

Option 1: Since Sam owned a home in the 3 years prior to the new purchase, he isn’t eligible for the credit. Just like example 2, Suzy can get all of the $8,000 credit.

Example 4:Same as example 1 however Sam’s AGI is $85,000 and Suzy’s is $60,000. Note:  If the AGI is between $75,000 and $95,000, the amount of homebuyer credit allowed is “phased out” the closer the AGI gets to $95,000.

Option 1: Since Sam’s AGI is half way in the “phase out”, the amount of credit that is allocated to Sam will be reduced by 50%.  Let’s say the credit is split 50/50 with Sam and Suzy.  Suzy’s return will show her share of the credit – $4,000 and since her AGI is less than $85,000, she’ll get all of the $4,000 credit on her tax return.

When Sam files his tax return, he’ll show his share of the credit ($4,000) credit with an AGI of $85,000.  However, the phase-out calculation will limit the credit on his tax return to only $2,000 ($4,000 times 50%).

In this case, only $6,000 of the $8,000 was available as a refund or to reduce taxes.

Option 2: Suzy could get all of the $8,000 credit.

As you can see, the homebuyer tax credit could be a real boost for the housing industry and the economy – and be a great exercise in sharing the credit and handling relationships!

For more information on this great credit, check out Taking the First-Time Homebuyer Credit.