Do you remember that first time? Your first date or that first kiss! The first time catching the football in the end zone! Buying that first home! Great memories and powerful emotions! Not to be left out, in 2008, Congress got into the first time home buying game or so many Americans believed. Thinking that all of their previous stimulus efforts had been unsuccessful, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA). By this law, Congress intended to help low and moderate income families buy their first home.
The unforeseen and uneven impact of this law and subsequent amendments can be best shown by summarizing its affect on two brothers. As a result of a diligent focused approach to his home purchase, Jake received a 15-year, $7,500 interest free loan from the federal government. His brother Mike, due to a more laid back, even lackadaisical approach to his purchase, unwittingly received an $8,000 gift from that same government.
Like peas in a pod, these two families presented the same outward appearance, with indistinguishable social, financial and geographical circumstances. Regardless, they had received significantly different treatment under our tax code. These incredibly dissimilar outcomes occurred as a result of identical actions taken only two weeks apart but which were completed under the same tax law in effect at the time each purchase had closed. It is likely that, interspersed among frequent, muffled expletives, Jake was muttering that famous advertising slogan, “I wanna be like Mike.”
Forget trying to comprehend the tax code and thereby make rational decisions. Fate must also smile down on you. Not only is the Internal Revenue Code overly complex, it is changed so frequently, so randomly, understanding it has become nearly impossible; sound tax planning virtually unattainable. The below excerpt regarding the first-time homebuyer credit was taken directly from the IRS FAQ web page.
The first-time homebuyer credit is a tax credit for individuals and couples who purchase a new home after April 8, 2008, and before May 1, 2010. There are several versions of the credit depending upon when the home was purchased:
- For homes purchased in 2008, the credit, with some exceptions, must be repaid and takes the form of a $7,500 interest-free loan.
- For homes purchased in 2009 prior to November 7, the credit is for a maximum of $8,000 and, with some exceptions, does not have to be repaid, but it's only for new home owners who have not owned a home in the prior three years.
- Beginning November 7, 2009, an additional category of new homebuyers, long-time residents (who owned their own homes), was added. The credit for this group is a maximum of $6,500, which, with some exceptions, does not have to be repaid.
As with almost all provisions of the IRC, nothing about this credit was clear, beginning with the IRS guidance stated above. The first bullet states that credit for homes purchased in 2008 had to be repaid. The absence of a disclaimer excluding a purchase ‘elected’ to have been made in 2008 is glaring. Taken literally, a reasonable interpretation of the second bullet suggests the credit amount changed as of November 7, 2009. It did not – at least for ‘First Time’ buyers. Finally, many people would not associate the term used in the third bullet, “long time residents (who owned their own homes)” with the term “new homebuyers.”
These criticisms might be nit-picking. Regardless, consider the name originally given to this credit. I suspect when most Americans initially heard or read the name – first time home buyer credit – they likely assumed they were ineligible for the credit if they had ever purchased a home. That interpretation is not exactly true. The term was defined in the law, excerpted below.
The term `first-time homebuyer' means any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.
Thus, as originally crafted, this credit was not limited to a true ‘first time’ home buyer. The credit was actually available to a first, second, or even third time buyer, in fact, someone who had made any number of previous home purchases. The limit is more accurately described as restricted to anyone who had not owned a home within the previous 3 years.
The initial language also confused taxpayers by portraying the benefit as a tax ‘credit.’ Although the amount properly calculated did reduce any tax due or increase the refund amount, many of us might call it something other than a credit. When hearing the word ‘credit’ many believe it I something received, not borrowed.
The truth, as more honestly stated in the IRS guidance reprinted above, is that the credit was actually a 15-year interest free loan. The taxpayer claiming the credit had to repay the amount received. Why can’t we, as Rhett Butler affirmed to Scarlett, “…look things in their eyes and call them by their right names?” Why not call things what they are? This tax provision should have been named a “Restricted, Limited, Fifteen Year, No Interest, Home Buyer Assistance Loan.”
Even before eligible taxpayers could claim the credit, Congress changed certain provisions by enacting the American Recovery and Reinvestment Act of 2009 (ARRA). Section 1006 of this law was titled “Extension of and Increase in First-Time Homebuyer Credit; Waiver of Requirement to Repay.” This modification was no more appropriately christened than the original law.
Think about the meaning of “Waiver of Requirement to Repay”. The original law required all credits received by any taxpayer to be repaid (as with everything in our tax code, one must be careful with the use of absolutes – ex. “all”). Taken at face value, the last phrase of the title for Section 1006 negates the repayment provision of the original act, changing it from a de facto loan to an actual credit. And in fact, with one restriction, that is what it did. What was the restriction, you may wonder? It was one of timeframe.
The original act covered the time period April 9, 2008 until July 9, 2009. Under the initial version, all credits had to be repaid. The amended version changed the end date until December 31, 2009 and exempted credits received for purchases made in 2009 – including those ‘elected’ to have been made in 2008 – from repayment resulting in Mike’s good fortune. Perhaps this section should have been titled “Extension of and Increase in First-Time Homebuyer Credit; Limited Waiver of Requirement to Repay – Hope You Waited to Close”
I recognize that I may not be the sharpest tool in the shed. Nonetheless, it is unclear to me how or why any of these dates were selected. The original measure was signed into law July 30, 2008, and made the credit retroactively effective for all purchases after April 9, 2008. The first amendment to the law was signed on February 19, 2009. The effective date for the waiver provision was also retroactive for all purchases made after January 1, 2009. Why not make the repayment exemption provision of the amendment retroactive to the original effective date?
It may be hard to imagine, but, prior to the expiration of the time period covered by the first amendment, the law was amended once again. On November 6, 2009, Congress passed the Worker, Homeownership, and Business Assistance Act. This law made a number of changes to this credit, one of which was notable. In a consistent effort to maintain inconsistency, these changes were not retroactive.
In what can reasonably be determined as a deliberate attempt to randomly designate winners and losers from among taxpayers, Congress made a significant change to the income limits for eligibility. For purchases made before November 7, 2009, married taxpayers with modified adjusted gross income over $170,000 were ineligible for the credit. For purchases made after November 6, 2009, married taxpayers with modified adjusted gross income up to $225,000 were eligible for the full credit.
In plain English this modification meant a husband and wife who made $170,100 and purchased their home on November 6, 2009 received no credit. A husband and wife who earned $224,900 and who closed their home purchase one day later received an $8,000 credit. Perhaps this law might have been similarly titled “The Worker, Homeownership, and Business Assistance Act – Hope You Waited to Close – Again.”
To paraphrase the National Taxpayer Advocate, our tax code has become a lottery. Amendments to the IRC often pick winners and losers from among American taxpayers. Forget insider stock trading. I want to get early intelligence on changes to our tax code.
Are you confused? Angry? Apathetic? Or just opening the bourbon? Is the existence and seriousness of the problem becoming clear? As Warden Norton offers in Shawshank Redemption, “…You understand me? Catching my drift? Or am I being obtuse?”
Else, like our tax code itself, has this discourse only complicated the issue and confused the reader?
Have to go now. It's time for the tasting of the royal beer. And I am to have the first draught!