Married Couples and the Home Buyer Tax Credit

The Home Buyer Tax Credit is a wonderful program, but the already complicated eligibility requirements of the tax credit become even more complex if you are a married couple, or buying with someone else such as a significant other, a friend, or a family member.

For that reason, we have provided this analysis of the challenges facing married couples trying to claim the home buyer tax credit.

Married Couples

The home buyer tax credit’s application to married couples is extremely restrictive, generally requiring that both married partners fully qualify in their own right for the couple to claim the credit.  This has a lot of serious implications:

First, both husband and wife have to be eligible for the tax credit. For example, if the wife is qualified as a first-time home buyer because she has never owned a home before, but the husband owned a home within the past three years but does not qualify as a long-time homeowner (i.e., he owned for fewer than five consecutive years out of the last eight), the married couple is not eligible for a tax credit.  If one spouse is eligible and the other is not, the married couple is collectively ineligible.

Second, even if both spouses are eligible for a home buyer tax credit, they have to mutually qualify for the SAME TYPE of tax credit. That is, they both have to qualify as either a first-time home buyer or a long-time homeowner.  If the husband qualifies as a long-time homeowner, but the wife qualifies as a first-time homebuyer, the couple itself will not be eligible.  Essentially, they cancel each other out: he doesn’t qualify as a first-time home buyer, and she doesn’t qualify as a long-time homeowner, so the two of them together as a couple are not eligible.

Third, even if both spouses would be eligible individually for a “step-up” home buyer tax credit as long-time homeowners, they have to both qualify by owning and living in the SAME RESIDENCE. For example, let’s say that a man and woman got married two years ago.  Before they married, they each owned and lived in their own homes for over ten years.  After the wedding, he sold and moved out of his home and bought half of her home, where they’ve lived together for the past two years.  You would think they would both qualify as long-time homeowners, because they each lived in a principal residence they owned for five consecutive years out of the last eight.  But they don’t, because they didn’t share the SAME home for five consecutive years out of the last eight. His years in his previous home do not count, because it was a different home from the one he’s claiming as his owned residence now.

Finally, even if the married couple is otherwise eligible for a home buyer tax credit, the couple has to either meet the income restrictions for jointly filing couples or both spouses have to meet the individual income restrictions for those filing separately. The tax credit is only available to jointly filing married couples who make less than $225,000, although couples making up to $245,000 are eligible for a partial tax credit.  So a married couple filing jointly cannot together make more than $245,000 to qualify for a tax credit.

For couples who file separately, their income is measured independently, with each of them subject to the individual $125,000 income limitation (up to $145,000 for a partial tax credit.  But in these cases each spouse is only eligible for half of the potential tax credit (e.g., up to $4,000 for a first-time home buyer, not the full $8,000).  Essentially, a married couple filing separately “splits” the potential tax credit between the two of them, and each has to be independently eligible under the individual income limitations for his or her half of the credit.  For example, if the wife makes more than $145,000, and the husband makes less, only the husband would be eligible for a tax credit, and in that case only for half of the tax credit he would be entitled to as an unmarried individual.

All of these restrictions apply even to married couples who are legally separated – even if you’re not living together, and have not lived together for a long time, your spouse’s eligibility will affect your own as described above.  However, your marriage status is measured at the time of your purchase, not the time of your tax filing, so if you get married after your purchase you would not be considered a “married” couple.

To sum up, in order for a married couple to claim the home buyer tax credit, both spouses have to be eligible, be eligible for the same tax credit, and if they are claiming to be long-time homeowners they must have owned and lived in the same home together for five consecutive years out of the last eight.

Unmarried Couples

These kinds of restrictions do not apply to unmarried couples who are buying a home together.  Essentially, unmarried buying partners are each treated separately, not as a couple.  If two unmarried people buy a new home together, and only one of them qualifies, the eligible partner can get the full tax credit to which he or she is entitled.  So in each of the cases discussed above, two unmarried people buying together could get a tax credit:

(1)    If she qualifies for a tax credit, and he is not eligible for any type of tax credit, she can get the full credit she’s entitled to.

(2)    If they qualify for two different types of tax credit (i.e., one is a first-timer, the other a long-time homeowner), they can each get a portion of the tax credit they’re entitled to.

(3)    If they both qualify as long-time homeowners, but for different residences, they can both claim a “step-up” home buyer tax credit on a co-purchase.

Note, though, that if both parties qualify for a tax credit, the IRS will require them to split the credit between them in “any reasonable manner.”  And even if they qualify for different credits, they will only get a portion of those two credits, not two full different credits (i.e., she can’t get an $8,000 first-time home buyer tax credit, and he a $6,500 “step-up” credit on the same purchase).

Finally, for unmarried couples buying together, their income is measured separately, pursuant to the $125,000 ($145,000 for a partial credit) limitation for individuals. But unlike married couples who file separately, two unmarried partners do not “split” the applicable tax credit between them and each entitled to the full tax credit if the other partner makes too much money to qualify.  So if one partner makes less than $125,000, and the other partner makes more than $145,000, the lower-income partner can get the full tax credit, not just the half of the credit that a spouse filing separately would get.

All of this applies to any people buying a home together, whether they are domestic partners, family members, friends, or the like.  Only buying partners who are planning to live in the home, though, are even eligible, so in a lot of co-ownership situations (i.e., a parent helping a child out) the co-owner would not even have to test eligibility.

The “Marriage Penalty”

The home buyer tax credit exacts what is probably an unintended “marriage penalty” against married couples that does not apply to unmarried couples.  In many cases, a man and a woman who by themselves would qualify for tax credits individually, or if they bought property as an unmarried couple, cannot get the credit as a married couple. This seems very unfair consequence of the way the credit is written.

This “Marriage Penalty” will not generally affect couples who have been married a long time. Most likely, such couples have either owned their home together or did not own at all.  If you’ve been married for the past ten years, for example, you probably owned a residence together, or you’ve been renting together.  In either case, a long-married couple would be eligible for a tax credit.  But even in these cases, both spouses would have to be on the title to the home, because if only one spouse owns the home where both spouses live, the non-owning spouse’s ineligibility as a long-time homeowner would disqualify the couple for the “step-up” home buyer tax credit.

The “Marriage Penalty” could have significant impact, though, on any couples who have been recently married. Essentially, recently married couples are probably only going to be eligible for the first-time home buyer tax credit, because it would be extremely unusual for a newly married couple to have the shared ownership history required by the long-time homeowner tax credit.  So the couple will generally be okay only if neither spouse has owned a home within the past three years. In those case, they’ll both qualify as first-time home buyers and could get the first-time home buyer tax credit.  That’s the easy case.

But it’s going to be very difficult for a recently married couple to qualify as a long-time homeowner and earn the “step-up” tax credit.  If one spouse already owns his or her own residence, that spouse’s disqualification as a first-time home buyer would require both spouses to qualify for the long-time homeowner tax credit for that SAME residence.  In other words, they’d have to have gotten married after living together in the same home that they both owned for five consecutive years out of the last eight.  This seems an unlikely situation for a newly married couple.

To sum all that up, the only way that a recently married couple could be eligible for the home buyer tax credit would be if (1) they both qualify as first-time home buyers, not having owned in the past three years, or (2) they have been living together in a home that they both owned for at least five out of the last eight years.  That significantly narrows the applicability of the home buyer tax credit for recently married couples.

The Home Buyer Tax Credit also has a “Marriage Penalty” with regard to the income restrictions. The income restriction penalty applies in two ways. First, married couples who file jointly are penalized in situations where the couple is above the $245,000 maximum income limitation, but one of the spouses would qualify individually if the couple filed separately.  For example, even for a couple who would otherwise qualify, a jointly filing couple with one spouse making $175,000 and the other making $100,000 would not be eligible with joint income at $275,000.  But if the couple filed separately, the lower-income spouse would be eligible for half of the applicable tax credit.  This is something of a penalty, although it’s probably consistent with the way that that IRS deals with jointly filing couples.

Second, and more unfair, is how the income restrictions apply differently to married couples filing separately and unmarried couples buying together. For married couples filing separately, each spouse is only entitled to half of the applicable tax credit, even if the other spouse’s income does not qualify for the tax credit.  But for unmarried couples, either purchasing partner can obtain the full applicable tax credit where the other partner does not qualify under the income guidelines.