The IRS has issued Notice 2009-12 to explain how the IRC § 36 first-time homebuyer credit should be allocated between unmarried taxpayers who buy a principal residence together.
Section 36 was added to the Code last year by the Housing and Economic Recovery Act of 2008, PL 110-289. It gives first-time homebuyers a refundable credit of 10% of the purchase price of the home, up to $7,500 ($3,750 for married taxpayers filing separately). The credit phases out for homebuyers with modified adjusted gross income (MAGI) between $75,000 and $95,000 (between $150,000 and $170,000 for joint filers). The credit applies for both regular tax and AMT purposes.
To be eligible, a taxpayer must be a first-time homebuyer, defined as an individual (and, if married, the individual’s spouse) who has not had a present ownership interest in a principal residence during the three-year period ending on the date the principal residence is purchased (section 36(c)(1)). Unmarried individuals may jointly purchase a residence and allocate the $7,500 credit between them (section 36(b)(1)(C)).
In the notice, the Service explains that if two or more taxpayers who are not married purchase a principal residence and otherwise satisfy the section 36 requirements, the first-time homebuyer credit may be allocated between the taxpayers using any reasonable method. The IRS says a “reasonable method” is any method that does not allocate any portion of the credit to a taxpayer who is not eligible to claim that portion.
A reasonable method includes allocating the credit based on the taxpayers’ contributions toward the purchase price of the residence as tenants-in-common or joint tenants or the taxpayers’ ownership interests in a residence as tenants-in-common. The notice provides several examples of how this allocation could work. The examples from the notice are reproduced in their entirety here:
Example 1. A contributes $45,000 and B contributes $15,000 toward the $60,000 purchase price of a residence. Each owns a one-half interest in the residence as tenants-in-common. Under section 36(a), the allowable credit is limited to 10% of the purchase price, or $6,000. A and B may allocate the allowable $6,000 credit three-fourths to A and one-fourth to B based on their contributions toward the purchase price of the residence, one-half to each based on their ownership interests in the residence, or using any other reasonable method (for example, the entire credit to A or B because both A and B are eligible to claim the entire allowable credit).
Example 2. A contributes $10,000 for a down payment toward the $100,000 purchase price of a residence, and A and B obtain and are jointly liable for a $90,000 mortgage for the remainder of the purchase price. Each owns a one-half interest in the residence as tenants-in-common. Under section 36(b)(1)(A), the allowable credit is not $10,000 (10% of the purchase price) but is limited to $7,500. A and B may allocate the allowable $7,500 credit 55% to A and 45% to B based on their contributions toward the purchase price, one-half to each based on their ownership interests in the residence, or using any other reasonable method (for example, the entire credit to A or B because both A and B are eligible to claim the entire allowable credit).
Example 3. On April 15, 2008, A pays the entire $100,000 purchase price of a residence and is the sole owner. Under section 36(b)(1)(A), the allowable credit is not $10,000 (10% of the purchase price) but is limited to $7,500. On May 12, 2008, A transfers a one-half interest in the residence to B as a tenant-in-common for $10,000. A may claim the entire allowable $7,500 credit. Because B acquired B’s interest in the residence from A in part by gift, B’s basis in the residence is determined under section 1015 by reference to A’s basis in the residence. Therefore, B did not purchase an interest in the residence within the meaning of section 36(c)(3), and no portion of the credit may be allocated to B because B is not eligible to claim any portion of the credit.
Example 4. A and B each contribute $50,000 toward the $100,000 purchase price of a residence and own a one-half interest in the residence as tenants-in-common. Under section 36(b)(1)(A), the allowable credit is not $10,000 (10% of the purchase price) but is limited to $7,500. However, B is not a first-time homebuyer within the meaning of section 36(c)(1). Therefore, no portion of the credit may be allocated to B because B is not eligible to claim any portion of the credit. A may claim the entire allowable $7,500 credit.
Example 5. A contributes $75,000 and B contributes $25,000 toward the $100,000 purchase price of a residence, and each owns a one-half interest in the residence as tenants-in-common. Under section 36(b)(1)(A), the allowable credit is not $10,000 (10% of the purchase price) but is limited to $7,500. A’s MAGI is $100,000 and B’s MAGI is $60,000. Because A’s MAGI exceeds the $95,000 MAGI cap, any portion of the credit allocated to A would be reduced to $0. A and B may allocate the entire allowable $7,500 credit to B because B’s MAGI is less than the $75,000 MAGI threshold and, therefore, B is eligible to claim the entire allowable credit.
Example 6 . A and B each contribute $50,000 toward the $100,000 purchase price of a residence and own a one-half interest in the residence as tenants-in-common. Under section 36(b)(1)(A), the allowable credit is not $10,000 (10% of the purchase price) but is limited to $7,500. A’s MAGI is $80,000 and B’s MAGI is $60,000. Because A’s MAGI exceeds the $75,000 MAGI threshold by $5,000, any portion of the allowable credit allocated to A will be reduced by one-quarter, $5,000 (MAGI in excess of $75,000) / $20,000. A and B may allocate the allowable $7,500 credit one-half to A and one-half to B ($3,750 each) based on their contributions toward the purchase price of the residence or their ownership interests in the residence. However, A’s $3,750 portion of the credit is limited by section 36(b)(2) and is reduced by one-quarter ($3,750 × 0.25 = $937.50) to $2,812.50 ($3,750 − 937.50). Alternatively, A and B may allocate the allowable $7,500 credit using any other reasonable method (for example, the entire credit to B because B’s MAGI is less than the $75,000 MAGI threshold and, therefore, B is eligible to claim the entire allowable credit).
Example 7 . A and B, who are sisters, each contribute $50,000 toward the $100,000 purchase price of a residence, and each owns a one-half interest as tenants-in-common. Under section 36(b)(1)(A), the allowable credit is not $10,000 (10% of the purchase price) but is limited to $7,500. A and B purchase the residence from their cousin, C. A, B and C are not related persons within the meaning of section 36(c)(5). Therefore, A and B may allocate the allowable $7,500 credit one-half to A and one-half to B based on their contributions toward the purchase price of the residence or their ownership interests in the residence. Alternatively, A and B may allocate the allowable $7,500 credit using any other reasonable method (for example, the entire credit to A or B because both A and B are eligible to claim the entire allowable credit).
