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,

(f) alimony,

(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.

 

DC Real Property Assessment Cap Credit

Understanding the property tax assessment process can be a bit tricky. Specifically, it can be difficult to understand the difference between an assessed value and a taxable assessed value. Part of the confusion has to do with the Assessment Cap Credit. Here is an example of a recent question on this topic: 

Question: On my DC Tax bill, the assessed value is listed as $388,500, but my taxable assessment was only $291,200, a difference of $97,300. What accounts for this difference?

Answer:  The bulk of the difference has to do with the Homestead Deduction, which reduces the real property taxable assessment by $72,450.  However, there is a second benefit to the Homestead Deduction that receives a lot less attention, the Assessment Cap Credit.  This credit provides that the taxable assessment cannot increase more than 10% per year.  The credit is not applied against the assessed value, but it is used to reduce the taxable assessed value.  In the above question, the additional credit that reduces the taxable assessment by a further $24,850 is the assessed cap credit.  Further, based on the above numbers, next year’s taxable assessment cannot exceed $320,320 ($291,200 plus 10%), regardless of the assessed value (assuming of course that the property is still registered as a homestead).

The District of Columbia Office of Tax and Revenue has great information on their website that explains in detail the real property process and the credits available.

Catching up with the First-time Homebuyer Tax Benefit Amendment Act of 2015

Catching up with the First-time Homebuyer Tax Benefit Amendment Act of 2015

First-time buyers and real estate pros in the District of Columbia awaiting word on the status of the First-time Homebuyer Tax Benefit Amendment Act of 2015 can expect to hear a response from the office of Mayor Muriel Bowser this week.

A final version of the bill that would amend the District of Columbia Deed Recordation Tax Act was transmitted to the Mayor’s office Feb. 2, and a response is due by Feb. 16.

The revised transfer tax rule would retroactively go into effect Oct. 1, 2016, according to the final bill, provided the measure is approved by the Mayor and passes the 30-day congressional review period.

As we previously reported, the bill will create a new transfer tax rate of 0.725% for homebuyers who have never purchased a house, condo or share in a cooperative unit in the District of Columbia. The current transfer tax rate for D.C. homebuyers is 1.1 percent on purchases of $399,999 or less and 1.45 percent on purchases of $400,000 or more.

The median home price in the region soared to a record high of $446,000 last summer, the Washington Post reported.

When we checked in last April with the bill known as B21-0417, or the First-time Homebuyer Tax Benefit Act of 2015, it was under committee review and awaiting scheduling for a mark-up. That happened last November.

After a first reading of the of the bill was delivered Dec. 3, 2016, Councilwoman Elissa Silverman (D-At Large) was the only one to vote against the measure, later telling Washington City Paper that because the bill did not specify income limits, the tax break would benefit a homebuyer in Ward 3 five times more than a homebuyer in Ward 8, rendering the benefit "regressive."

Councilwoman Silverman was not the only individual to express this sentiment. The lack of an income restriction has been a concern of the bill’s critics all along.

During testimonies that took place about a year ago, a representative from the D.C. Fiscal Policy Institute said the city would negatively impact its Housing Production Trust Fund, which has produced or preserved more than 8,000 affordable homes since its inception in 2002.

“Rather than provide a new tax benefit for all first-time homebuyers, DCFPI recommends that policymakers review the city’s current deed tax assistance to low- and moderate-income homebuyers and make adjustments if they appear warranted,” said DCFPI Housing Policy Associate Claire Zippel in her testimony last February.

The city regularly alters the income and purchase price restrictions on its popular D.C. Tax Abatement program, and the D.C. Office of Tax and Revenue most recently increased the income and purchase price limitations at the end of last year.

However, the income-restriction concern in regards to B21-0417 was addressed Dec. 13, 2016 when Councilwoman Anita Bonds (D-At Large) introduced an amendment that added two eligibility requirements, an income limit of 180 percent of the area median income as well as proof of District residency.

The median income in D.C. in 2015 was $109,200 annually, so buyers earning up to $196,564 could potentially qualify for transfer tax relief.

The amendment also created a lifespan of four years after the program’s implementation date, at which point the Mayor must submit a report to City Council that reviews the benefits or impact of the tax relief program on homeownership rates.

With the Bonds amendment in place, Council voted unanimously in favor of the First-time Homebuyer Tax Benefit Amendment Act of 2015 on Dec. 20, 2016.

DC Tax Abatement income, purchase price limits increase

DC Tax Abatement income, purchase price limits increase

For the latest DC credit program, please view information here on DC's Newly Enacted First-Time Homebuyers Recordation Tax Reduction program that went into effect October 1, 2017.   

Purchase price and income thresholds to qualify for the popular DC Tax Abatement Program have increased, hopefully making it easier for more homebuyers to become homeowners.

The District of Columbia Office of Tax and Revenue upped the purchase price threshold to $439,160 from $408,000.

At the same time, the income threshold for a single buyer increased to $58,980 from $57,540 while the income threshold for a two-person household increased to $67,380 from $65,760.

In "Economic Development Zones," the income limits are higher. For a single buyer, it's $67,265 and for a couple it's $76,890.

For more on income limitations and the DC Tax Abatement Program, please visit our page on the DC Tax Abatement Program.

Real estate website Trulia reports the median sales price for homes in DC was $539,000 over the past three months, an increase of 5 percent over the previous year.

The DC Tax Abatement Program provides an exemption from the DC 1.1% Recordation Tax and an allowable credit from your seller(s) of 1.1% equal to the DC Transfer Tax. Additionally, the program provides a five-year real estate tax abatement that begins October 1 following your date of closing.

The numbers in this article may be out of date. Visit our guide how to qualify for DC Tax Abatement for the most current information.

The cost of buying a home in Montgomery County to increase Sept. 1

Despite protests from the local real estate community, the Montgomery County Council last week unanimously approved an increase to the recordation tax, paid by homebuyers and sellers at closing, as a way to pay for school construction.

The recordation tax rate will now increase for the first $500K from $6.90/$1,000 to $8.90/$1,000 and for amounts above $500K from $10/$1,000 to $13.50/$1,000, a "pretty significant increase said County Council President Nancy Floreen who proposed the bill.

Put another way, a property purchased for $400,000 under the old tax rate would carry a recordation tax of $2,415 split between the buyer and seller. Under the new rate, the recordation tax will be $2,670, an increase of $255. A property purchased for $700,000 will see an increase of $1,155 in recordation taxes. A property purchased for $1,000,000 will cost an additional $2,205 in recordation taxes.

The median sales price in Montgomery County was approximately $411,000 last April, up 1 percent from a year ago.

Initially the tax increase was slated to take effect July 1, but the Council pushed it back to Sept. 1 amid protests from the real estate community who said they need more time to adjust to the change. The Council also opted to increase the county’s principal residence exemption from the first $50,000 to the first $100,000 in response to industry concerns.

Those in favor of the tax increase, such as the county’s Board of Education and the PTA, said funding increases for schools have not kept pace with growing enrollment. Montgomery County Public Schools is adding around 2,500 new students per year.

Those opposed to the tax increase said the financial burden was being unfairly placed upon a small subset of the county’s population. Roughly 13,000 units are bought and sold each year in Maryland’s most populous county that is home to over 1,000,000 residents. They also said increasing the recordation tax unfairly affects first-time homebuyers and elderly residents.

In the near future, the Council will examine ways to ease real estate tax burdens for senior citizens. They are also contemplating a 6 to 9 percent increase in property taxes.

Check back for updates as we hear more from County Council.

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