DC Tax Abatement: A Deeper Look at the Income Threshold
Note: For those unfamiliar with the DC Tax Abatement program or in need of a refresher, Federal Title & Escrow covers the basics of the program in the following blog post - How to Qualify for the DC Tax Abatement Program. As always, you can find the most up-to-date Tax Abatement Application on the Office of Tax and Revenue’s website.
I recently had a question from one of our agents regarding the income threshold for the DC Tax Abatement Program. The question was prompted because the buyer’s salary was below the income limit; however, the buyer planned to liquidate assets (specifically stocks) in order to make the down payment. The issue boiled down to this - how would the liquidation of assets affect qualifying income for the DC Tax Abatement Program?
The answer is relatively straightforward. Part III of the Tax Abatement application requires that an applicant disclose his or her household gross income. This includes but is not limited to the following:
(a) wages and salary,
(b) dividends & interest,
(c) business income,
(d) pensions & annuities,
(e) capital gains & profits,
(g) social security,
(h) unemployment insurance and/or workman’s compensation,
(i) support money and/or public assistance grants,
(j) sick pay excluded from home,
(k) military compensation,
(l) fellowship awards and grants,
(m) life insurance proceeds,
(n) veteran’s pension and disability benefits,
(o) GI bill benefits,
(p) loss time insurance,
(q) income subject to Unincorporated Business Tax,
(r) cash distributions, and
(s) other [the District’s catchall].
In the aforementioned situation, the liquidation of assets – specifically the capital gains/profits from those assets – would have counted towards the buyer’s gross income and resulted in the buyer’s disqualification from the DC Tax Abatement program.
Interestingly, the timing of the liquidation of assets matters less than you may suspect. The tax abatement program instills a duty to report when a homebuyer ceases to qualify for the program. If the homebuyer liquidates assets after the initial application – thereby increasing his or her household gross income over the threshold, the homeowner must alert DC as to the disqualification. The Office of Tax and Revenue’s Special Programs Unit audits every application every year, and a homeowner who improperly avails themselves of the program potentially faces removal from the tax abatement program, recoupment of real property taxes with penalties and interest, and recoupment of the previously exempted transfer and recordation taxes.
Fortunately, our buyer was able secure additional financing and avoid potential disqualification since the issue addressed in a timely manner.
If you have any questions regarding the calculation of gross income for the DC Tax Abatement application, contact us! Federal Title & Escrow is here to help you throughout the settlement process – including any potential questions with the DC Tax Abatement application.