Missouri Enables Tax Credit to Be Used for Downpayments
While NAHB members continue to push hard for a stronger tax credit to stimulate housing demand and the nation’s economy, programs have been recently announced that would enable home buyers to use the current $7,500 credit for first-time purchases as a downpayment.
Passed by Congress last July with high hopes that it would encourage significant numbers of wavering prospective buyers to return to the marketplace, the repayable credit has several limitations that have yielded disappointing results; the inability of buyers to monetize the tax benefit and use the tax proceeds at the time of closing is one of them.
As indicated in the instructions for Form 5405, home buyers can only claim the tax credit on their income tax return. The tax code does not allow the credit to be claimed until the home purchase has been completed, although taxpayers who purchase a home this year can claim the credit on their 2008 return, significantly accelerating the refund.
Gaining national attention, the state housing finance agency of Missouri — the Missouri Housing Development Commission (MHDC) — has unveiled a program that monetizes the tax credit by providing home buyers with a short-term loan.
Under the MHDC Tax Credit Advance Loan Program, qualified first-time home buyers can receive a no-interest, second mortgage at the time of closing worth up to 6% of the purchase price or $6,750 – whichever is less. In exchange for a small administrative fee of $350, this second mortgage can be applied to downpayment and closing costs.
The home buyer claims the $7,500 credit on their income tax return and then uses the proceeds to pay off the tax credit advance loan.
Home buyers must also obtain their first mortgage through this program, which uses taxable bond proceeds. (The home buyer tax credit cannot be used in conjunction with tax-exempt bond programs).
The program is subject to other limits and rules but offers a method of directly using the tax credit for the purpose of making a downpayment on a home. The program has the added advantage of being administered by the state housing finance agency, which is a trustworthy source for home buyers and other housing market stakeholders.
Interested home buyers in Missouri can consult the MHDC Web site for more information. Builders and home buyers in other states should inquire with their state’s housing finance agency about the prospects for similar tax credit advance programs in their state.
Using Mortgage Credit Certificates
In a related issue, there is still some question in the marketplace over whether the home buyer tax credit can be combined with the mortgage credit certificate program. (For a full report from NAHB on this issue, click here.)
NAHB has requested guidance from the IRS and the Department of the Treasury on this matter. However, while addressing other qualifying tests for the tax credit, to date IRS publications on the credit have been silent on the question of mortgage credit certificate use.
The tax code is clear that buyers who participate in a mortgage revenue bond home buyer program financed by tax-exempt bonds cannot qualify for the credit. However, the law is unclear on mortgage credit certificates.
In the view of Robert Dietz, NAHB’s director of tax issues, home buyers in the mortgage credit certificate (MCC) program should be able to claim the first-time home buyer tax credit. Section 36 of the Internal Revenue Code — which authorizes the tax credit program — states that buyers cannot claim the credit if their home is financed by “the proceeds of a qualified mortgage issue, the interest on which is exempt from tax under Section 103.” This is the prohibition against using tax-exempt mortgage revenue bonds (MRBs) with the tax credit.
Dietz notes that despite linkages between the MRB and MCC programs, mortgage credit certificates are authorized under Section 25 of the tax code. This implies that MCCs and the first-time home buyer tax credit may be used in tandem.
For more information, e-mail Robert Dietz, or call him at 800-368-5242 x8285.