2010 Homebuyer Tax Credit Summary

On March 25, Gov. Schwarzenegger signed AB 183 into law. The legislation becomes effective on May 1, 2010. The bill provides for a tax credit toward the purchase of a “qualified principal residence” which includes: (1) existing homes purchased by first-time homebuyers; and (2) newly constructed homes.

This summary will focus only on those provisions applicable to the purchase of a newly constructed home.

Similarities of AB 183 to the 2009 Tax Credit

Like last year’s credit, AB 183 provides:

• The amount of the credit is up to $10,000 per home or 5 percent of the purchase price, whichever is less.

• The credit is spread equally over a three-year period, and the actual amount of the credit that may be taken each year may vary depending upon the amount of state tax owed by the taxpayer for each of the three years.

• The credit is not refundable (i.e., you may not receive a refund in excess of what you paid in taxes for the year).

• Unused credit may not be carried forward to the next year.

• Homes which are eligible for the credit are new single-family homes, either attached or detached.

• A new home is one that has never been previously occupied.

• The home must be owner-occupied (no investor purchases).

• The buyer must live in the home as his or her principal residence for at least two years immediately following close of escrow.

• The tax credit is allowed for the purchase of only one home per buyer.

• Credits will be issued on a first-come, first-served basis.

• Credits may not be transferred to other buyers or other homes.

What’s New for 2010

Limits on Who Can Receive a Credit

A buyer may not receive a credit if any of the following apply:

• A buyer previously received a credit pursuant to the 2009 legislation.

• A buyer is not at least 18 years old as of the close of escrow date (unless that buyer is married to someone who is 18 or older as of the close of escrow date).

• A buyer is related to the seller.

• A buyer is a dependent of another taxpayer.

Operative Dates

AB 183 establishes two alternative methods of qualifying for a tax credit:

1. Close of escrow. If a buyer of a new home closes escrow on or after May 1, 2010, and on or before Dec. 31, 2010, the buyer qualifies for the tax credit, unless the credit allocations have been previously exhausted by earlier closings and/or reservations (see Section 2 below). In order to qualify, the buyer must submit to the Franchise Tax Board (FTB), within two weeks of close of escrow:

  • (a) An executed settlement statement; and
  • (b) Certification by the builder under penalty of perjury that the home has never been previously occupied (this certification is the same as that required in the 2009 tax credit).

2. Credit reservation: Beginning May 1, 2010, the FTB will begin accepting tax credit reservations on a first-come, first-served basis. Reservations must be made on or before Dec. 31, 2010. If a reservation is made, the home must close escrow on or before Aug. 1, 2011. In order to reserve a credit:

  • (a) If the buyer and the builder desire to reserve a state tax credit, they must jointly sign and submit to the FTB a certification that they have entered into an enforceable purchase contract on or after May 1, 2010, and on or before Dec. 31, 2010. For purposes of the reservation only, both the contract must be signed and the certification submitted between May 1, 2010 and Dec. 31, 2010.
  • (b) (b) A copy of the signed contract must be included with the reservation request.
  • (c) Upon receipt of the certification, the FTB will notify the buyer that a credit has been reserved unless the credit allocations have been previously exhausted by earlier closings and/or reservations. In order to qualify, the buyer must submit to the FTB, within two weeks of close of escrow:
      (i) An executed settlement statement; and
      (ii) Certification by the builder under penalty of perjury that the home has
      never been previously occupied (this certification is the same as that
      required in the 2009 tax credit).
  • (c) A reservation will be canceled if, prior to Aug. 16, 2011, the taxpayer does not provide the information described in subsection (b) above or if the FTB receives notification of a cancellation.
  • (d) Due to the possibility of cancellations, the FTB will establish a wait list for certifications or cancellations on a first-come, first-served basis after the credits have been exhausted. It is recommended that if credits are exhausted, builders and buyers continue to apply for reservations (until Dec. 31, 2010) and submit qualifying close of escrow documents until the FTB announces that the credits have all been allocated.

3. The 2010 tax credit should provide credits for at least 14,285 new homes.

4. The federal tax credit will continue for contracts entered into prior to April 30, 2010. Closings may continue to receive a tax credit until June 30, 2010, provided they have entered into a contract on or before April 30, 2010. Therefore, if a builder and buyer are considering cancelling a contract and entering into a new contract on or after May 1, 2010 in order to reserve a state tax credit, they should carefully consider the possible impacts on the buyer’s ability to qualify for a federal tax credit.

The information contained in this publication should not be considered legal or tax advice. Prior to taking action with regard to the matters expressed herein, please consult a qualified and licensed legal and tax professional.