Q: Is the DC First Time Homebuyer's tax credit still available? We plan to purchase a condominium in the near future, and settlement may not take place until early in January, 2003?

A: Yes, if you are a first time homebuyer in the District of Columbia, and your settlement takes place before January 1, 2004, you may be eligible to take a credit of up to $5,000 on your Federal Income Tax return.

When Congress enacted the Taxpayer Relief Act of 1997, one of its important provisions -- directly and exclusively impacting on the District of Columbia -- was the “First-time Homebuyer credit for the District of Columbia.” This was a gift for new District of Columbia residents. If you buy a home in the District of Columbia, and it will be your principal residence, you may be eligible for a credit against your Federal taxes of up to $5,000.

This tax credit was to expire for homes purchased prior to December 31, 2000. However, as a result of efforts by Congresswoman Eleanor Holmes Norton (D-DC), Congress has extended the credit through the end of next year.

Under the law, it makes no difference if you have owned -- or still own -- property anywhere else in the world. It also makes no difference if you obtain tax credits from the State of Maryland -- or any other local or State jurisdiction -- in the past. So long as you fall within the definition of a “first-time home buyer”, you may be eligible for the credit.

And, for tax purposes, a “home” includes a single family house, a condominium unit or a cooperative apartment.

Let us first define the concept of "credit." Oversimplified, it will reduce the amount of tax you will have to pay by the amount of the credit. Compare a “credit” to a “deduction”. The latter is subtracted from either gross income or adjusted gross income, thereby reducing the amount of income which is subject to tax. Examples of “deductions” are mortgage interest payments (also known as “qualified residence interest”), points paid to obtain a mortgage loan, and real estate taxes.

A “credit”, on the other hand, is an amount that is subtracted from the amount of income tax the taxpayer would otherwise have to pay. A credit is a dollar-for-dollar reduction in tax liability. Examples of credits include education credits, child tax credits, foreign tax credits, and -- if you buy a home in the District of Columbia -- the first time home buyer credit. To obtain a clear understanding of the benefits of a credit, look at Lines 27 through 33 of your IRS Form 1040 for the year 2001.

Who is eligible for this credit? According to the law, the home must be purchased between August 5, 1997 and before January 1, 2004. This language means what it says: "purchased" and not "contracted for." In other words, you actually would have to settle on -- and take legal title to -- the house after August 5, 1997 - - and before the end of 2003.

Furthermore, to be eligible for the credit, the home buyer -- and spouse if married -- cannot have had any principal residence ownership interest in any other District property for a one-year period ending on the date of the purchase of the home. Thus, for example, if you own other real estate in the District of Columbia, but that real estate is not currently -- and has not for a one-year period ending on the date of the new purchase -- been your principal residence, you are still eligible for the tax credit.

There are no restrictions on the amount of the purchase price, nor on the location of the property, so long as it is within the District of Columbia. There are, however, income limitations. For single tax filers making over $90,000 – or joint tax filers making over $130,000, there is no tax credit.

Congress looked at the concept of "modified adjusted gross income" (AGI). AGI is a number that is between gross income and taxable income. You can find this number on Line 19of your 2001 Income Tax 1040 Return. Modified AGI is your AGI plus any amount excluded from your income as a foreign earned income, or because the income came from such places as Guam, American Samoa, or from Puerto Rico.

You compute the credit as follows:

1. joint tax filers -- you get the full $5000 credit until your modified AGI reaches $110,000. Then for every $1000 of modified AGI above this number, the credit is reduced by $250.00.

2. single tax filers -- you get the full credit until your modified AGI reaches $70,000. Then, for every $1000 of modified AGI above this number, the credit is reduced by $250.00.

There is a simple formula you can use to compute the amount of your eligible tax credit:

$5,000 x Modified AGI - $70,000 divided by $20,000.

Note: the above formula is for a single tax filer; substitute $110,000 for $70,000 if you file a joint return. Also note that married taxpayers who file separately can only get up to $2,500 by way of this tax credit.

If two or more unmarried individuals purchase a principal residence, the law requires the Secretary of the Treasury to prescribe the method of allocating the tax credit; in no case, however, can it exceed a total of $5,000. If you fall into this category, talk with your tax advisors as to how the allocations should be handled. Although the concept is simple, the law is complex. But its objective has been extremely successful. In l997, when the credit was first enacted, Congress made it clear that it wanted to encourage taxpayers to move into the District and purchase a home here. Clearly, the law has been a contributing element to the housing boom we have witnessed in the past few years.

If you are planning to purchase a house, you may be eligible for the tax credit. Some lenders are allowing the credit to be “converted to cash”, thus using it to help make a down payment on a house. For example, the credit alone might be enough to be a down payment on a $100,000 house.

Interest rates are currently very low. No one is willing to predict how long this will last. Thus, if you are in the market for a new home in the District – and if you want (or need) more tax deductions – as well as the first time homebuyer's tax credit – now is certainly the time to consider making that purchase. -