First-time homebuyer tax credit may be allowed as a down payment

Individuals may soon be allowed to use the first-time homebuyer tax credit as a down payment on the purchase of a home. According to the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Authority will shortly announce a new policy providing for the "monetization" of the credit.

There is no word yet on whether the IRS will change its course and permit the credit to be used as a down payment. According to an IRS spokesperson, although the credit is only available for a completed purchase and a purchaser cannot receive an advance payment of the credit before claiming it on their federal tax return, the credit does not preclude taxpayers from securing down payment assistance through any legally available means.

IRS updates information on credit

The IRS has also updated its online Frequently Asked Questions (FAQs) about the first-time homebuyer credit, including information on inherited homes, acquisitions from step-relatives, the recapture rules, and mortgage-payors.

Recapture of credit

The entire amount of the first-time homebuyer credit must be recaptured (i.e. repaid) in full on the tax return filed for the year the property stopped being the principal residence within the first three years. The IRS will revise Form 5405, First-Time Homebuyer Credit, for 2009 to discuss recapture.

Inherited homes

Inheriting a home and living in the home as a principal residence precludes an individual from being considered a "first-time homebuyer," either on that inherited property or on his or her next home. According to the IRS, there is no exception for taxpayers who did not buy their previous residence. Under the rules, to qualify as a first-time homebuyer the taxpayer and spouse (if applicable) must not have owned their principal residence for three years before purchasing the qualifying home.

Step-relatives

Acquiring a home from a related person is not a qualified purchase for purposes of the first-time homebuyer credit. Step-relatives are not related persons, the IRS clarifies.

Mortgage payor

The first-time homebuyer credit is allowed to be taken by a taxpayer who buys a home, puts the deed and mortgage in the taxpayer’s name, and lives in the home as the principal residence, even if the taxpayer does not make the mortgage payments.

(www.hud.gov/news; FAQs, www.irs.gov)