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Updated 5/12/2010

Topics:

  1. Tax credit on the purchase of a principal residence

Reported by Alex Gomory

The rules reported here establish the California state tax credit’s eligibility requirements when purchasing a new residence.

Tax credit on the purchase of a principal residence
Revenue and Financial Code §17059.1
Added by A.B. 183
Effective: May 1, 2010

A new tax credit – prepaid amounts of taxes over three years – is available to homebuyers of qualified principal residences who:

  • close escrow between May 1, 2010 through December 31, 2010; or
  • enter into an enforceable purchase agreement (PA) by December 31, 2010 and close escrow between December 31, 2010 and July 31, 2011.

A qualified principal residence is:

  • a single-family residence (SFR) that is new construction and has never been occupied; or
  • any SFR, new or existing, purchased by a first-time homebuyer.

A first-time homebuyer is any individual who has not purchased or owned a principal residence within three years prior to the close of escrow on the qualified principal residence.

A homebuyer must occupy the property as his principal residence for at least two years immediately following the purchase. If not, any remaining unapplied credit will be canceled and any previously applied credit will be recaptured. The homebuyer will be liable for any increase in tax attributable to the recapture of any credit previously allowed under the tax credit.

The amount of the tax credit is the lesser of:

  • five percent of the purchase price of the purchase residence; or
  • $10,000 — in the form of a $3,333 reduction each year for three years.

Editor’s note — If a homeowner is delinquent on state taxes, they can still qualify for the tax credit, but the amount they owe the state will be deducted from the five percent or $10,000 they are allotted.

The tax credit will be taken in equal amounts over three consecutive taxable years, beginning with the year escrow closes on the purchase. A homebuyer may only claim a tax credit once.

A homebuyer may not claim either tax credit if:

  • he was already permitted credit under the California state tax credit of 2009;
  • he is not 18 or older as of the close of escrow, unless he was married at the date of purchase, and his spouse is 18 years or older on the date of purchase;
  • his spouse is related to the seller; or
  • he qualifies as a dependent of any other taxpayer for the taxable year of the purchase.

For purchase of an unused, newly-constructed qualified principal residence that has never been occupied a homebuyer may reserve a credit prior to close of escrow. To reserve a credit for the new home, the homebuyer and seller (builder or REO lender) must jointly sign and submit evidence that they have entered into an enforceable PA to the Franchise Tax Board (FTB) between May 1, 2010 and December 31, 2010.

To receive the tax credit, within two weeks after the close of escrow of a qualified principal residence the homebuyer must provide the FTB with:

  • a copy of the properly executed settlement statement; and
  • one of the following:
  • if the property has never been occupied, a certification by the seller that the property has never been occupied; or
  • if the property is purchased by a first-time homebuyer, a certification by the homebuyer that he is a first-time homebuyer.

Editor’s Note — The certification form will be included in the homebuyer’s application for the tax credit to be released by the FTB prior to the May 1, 2010 effective date.

 

If married homebuyers who qualify for the credit file separately, the credit allowed will be equally apportioned between them.

If two or more non-married homebuyers are claiming the tax credit for the purchase of a qualified principal residence, the amount of the credit allowed will be allocated to each individual based on percentage of ownership.

The credits will be distributed on a first-come, first-serve basis. The total amounts of credit that may be allocated under this tax credit are:

  • $100,000,000 for qualified principal residences that have never been occupied; and
  • another $100,000,000 for first-time homebuyers.

Once the allotted credits have been exhausted, the FTB will establish a wait list for subsequently received certifications.

The FTB will inform waitlisted homebuyers by December 31, 2011 whether or not they will receive a credit.

The tax credit will be claimed by the homebuyer unless they were on the waitlist and received the credit on a qualified principal residence that was purchased in the 2010 taxable year, in which case the homebuyer may claim the credit on an amended income tax return for that taxable year.

Editors note — In order to apply for this tax credit, applicants must apply by fax only at (916) 855-557. The date and time stamp on the fax will be used in determining the allocation of the credit according to the first-come first-serve policy and the order of the waitlist.