The Taxpayer Relief Act of 1997 (the "Act"), was signed by the President on August 5, 1997. Taxpayers who have not recently owned a home in the District may be eligible for a one-time tax credit of up to $5,000 of the amount of the purchase price against federal income tax. The tax credit is reported on Form 8859, and the taxpayer must file Form 1040 to claim this credit.
You may claim the credit if:
- You purchased a main home during the tax year in the District of Columbia and
- You (and your spouse if married) did not own any other main home in the District of Columbia during the 1-year period ending on the date of purchase.
If you constructed your main home, you are treated as having purchased it on the date you first occupied it. Your main home is the one you live in most of the time. It can be a house, houseboat, house trailer, cooperative apartment, condominium, etc.
You may not claim the credit if:
- You acquired your home from certain related persons or by gift or inheritance. For details, see section 1400C(e)(2).
- Your modified adjusted gross income (see the instructions for line 2) is $90,000 or more if single, married filing separately, head of household, or qualifying widow(er); or $130,000 or more if married filing jointly.
- You previously claimed this credit for a different home.
I. In general
The Act allows first-time homebuyers of a principal residence in the District a one-time tax credit for the taxable year of up to $5,000 of the amount of the purchase price. In other words, the maximum tax credit is $5,000.
Example: If a principal residence only costs $3,000, then the allowable credit amount would be $3,000.
The maximum tax credit amount, however, is reduced from $5,000 to $2,500 for married taxpayers filing separately.
II. Purchase price
Purchase price means the adjusted basis of the principal residence in the hands of the purchaser on the date the residence is purchased. The date of acquisition is considered to be the date on which a binding contract to acquire the residence is entered into or the date on which construction of the residence commenced.
III. First-time homebuyer
An individual is considered a first-time homebuyer if such individual (and if married, such individual’s spouse) had no present ownership interest in a principal residence in the District during the 1-year period ending on the date of the purchase. An individual may be considered a first-time homebuyer only once.
IV. Principal residence
Generally, a taxpayer can have only one principal residence at a time. To be considered a principal residence, the residence must be physically occupied by the taxpayer. A principal residence is not limited to a house; it also includes a houseboat, trailer, cooperative apartment, or condominium.
In a situation where the taxpayer alternates between two homes, the home that he or she occupies the majority of the time will be considered the taxpayer’s principal residence.
The term "purchase" means any acquisition, meaning the acquisition of an existing dwelling or the construction of a new residence. Any acquisition from a related person by gift or inheritance, however, is not deemed a "purchase" within the meaning of the Act. Related person means a spouse, ancestor, or lineal descendant; it does not include sisters or brothers.
The credit phases out for individual taxpayers with adjusted gross income between $70,000 and $90,000 ($110,000 to $130,000 for joint filers). Accordingly, no credits are available for single individuals with incomes in excess of $90,000 or for married couples filing jointly with incomes in excess of $130,000.
Example: Alice and Bob Jones are a married couple filing jointly. They are first-time homebuyers in the District. Their adjusted gross income is $120,000. The Jones’ allowable credit is $2,500 or $5,000 - [$5,000 x [($120,000 - $110,000) / $20,000]]. Therefore, the basis of the Jones’ home must be reduced by $2,500, the amount of the tax credit.
VII. Credit limitation and carryover
Any credit not used because the taxpayer has insufficient tax liability in the year of purchase may be carried forward to reduce tax liability in any following year until all the credit has been used. The unused credit, however, may not be carried back to prior years.