As the mud settles in the puddle of the first time home buyer tax credit, some of the cloudier issues have begun to clear.
The other day a reader asked me to point him to actual documentation that an owner occupied duplex qualified for the first time home buyer tax credit.
He also asked whether he was inferring correctly from IRS literature that he could only take half the purchase price of the duplex and use that as the basis for the tax credit.
Well, I’ve polled some accountants and it’s unanimous.
Melanie Schlomann at Abdo, Eick & Meyers LLP says of the type of property, “The important point is it has to be a main home.” She directed me to the definition of “main home” found on IRS Form 5405 which reads:
Main home. Your main home is the one you live in most of the time. It can be a house, houseboat, house trailer, cooperative apartment, condominium, or other type of residence.
“The form instructions for the credit specifically state the credit is available for any first time home buyer purchasing their ‘main home” she adds. “There is no specific clause that states the answer. Many tax laws are open to interpretation and from what I read, a small multi-family residence would qualify”.
Cindy Stipek at Boynum & Barenscheer PLLP, agrees. “This includes single family detached homes, attached homes like townhouses and condominiums, manufactured homes and houseboats,” she said.
Stipek adds, “However, if the buyer is planning on living in part of the home and renting part out, I would reduce the basis in the part of the home that qualifies for the credit.”
In other words, if a buyer purchases a duplex for $250,000 and lives in half, $125,000 would count toward the tax credit. The credit would be ten percent of the $125,000 or $12,500. However, the credit is capped at $8000, thereby overriding the $12,500.
If the same buyer opted to purchase and live in a $400,000 fourplex, however, one quarter of the price would qualify for the basis, or $100,000. Ten percent of that is $10,000. Once again though, the credit would be limited to $8000.
As a result, to reap the maximum tax benefit, a buyer would need to select a duplex for $160,000 or more; meaning the half he lived in, or $80,000 get him the top credit. Conversely, if a buyer selects a single family home to purchase, it should be $80,000 or more to qualify for the entire $8000.
In the Minneapolis/St Paul duplex market, this shouldn’t be problematic. Of course, if you find a great property for $50,000, jump on it! You’ll still get $5000.