Last week, we wrote about the smart decisions that Congress made in creating the Home Buyer Tax Credit. Today, we’re reviewing some of the dumb decisions, either in the creating of the credit by Congress or the interpretation of that credit by the IRS.
Dumb Decision #1: Allow people already in contract as of November 6th to claim the credit.
If smart decision #1 was not making the November 2009 home buyer tax credit retroactive for earlier closings, it was similarly dumb to allow the tax credit to retroactively apply to deals that were in contract at the time. It’s great for people who got into contract prior to November 6th at a time when they did not qualify for a tax credit, who get a windfall, but it didn’t exactly create an incentive. Those people got into contract based on their own judgment that it was a good time to buy, and obviously, if they didn’t qualify at the time, were not depending on a tax credit. Giving them the windfall is great for them, and maybe good for the economy if it gives them money they’ll spend to buy stuff, but not exactly in line with the purpose of the credit. Congress knew enough to set a contract deadline of April 30, 2010 for the new credit, so it could easily have made the credit effective only for deals in contract after November 1, 2009 (or any other date).
That said, Congress might have had two justifications for this decision. First, putting a “must be in contract after” date in the legislation might have simply led a lot of people to mutually terminate contracts with their seller to reinstate the contracts in order to claim the credit. That’s pretty easy to do, and would create a lot of mess. Second, Congress might have seen the windfall issue, but decided that it was still a good idea to put money in the hands of home buyers to spur the economy.
Dumb Decision #2: Setting the deadline for contracts for long-time homeowners for April 30.
When Congress extended the tax credit until April 30, 2010 for contracts and June 30, 2010 for closings, it made sense. That gave buyers almost six months to get into contract on their purchases. For first-time home buyers, that was fine, since first-time home buyers had been eligible for a tax credit for over a year at that point, and another six months was more than enough time to flush out anyone who was still sitting on the fence.
But six months was NOT enough time for long-time homeowners, and Congress should have figured that out. Most of the people who will try to claim that long-time homeowner “step-up” credit are probably current homeowners, and six months is not enough time for a current homeowner to get their home on the market, do all the things they need to do to get it properly prepared for viewings, and then field offers. And most people want to get their home into contract before they start seriously looking at new homes, so you essentially need someone to execute two sales contracts in six months to get a long-time homeowner credit. In our experience, that’s tough to do, especially since the extended and expanded Home Buyer Tax Credit was put into place just before the holiday season. Indeed, our experience is that most homeowners don’t even know they are eligible, two months after it was enacted.
It’s just not enough time. First-time home buyers got about two years of tax credit eligibility, and all they have to do is find the right house and get into contract. Selling a home, and THEN buying a home, is much more difficult, and long-time homeowners only got six months, including the holidays, to do it.
Dumb Decision #3: Treating married couples differently from unmarried couples.
We’ve covered the “marriage penalty” issue extensively elsewhere — the inherent unfairness that a married couple in which one spouse qualifies as a first-time home buyer, and the other qualifies as a long-time homeowner, are rendered ineligible because they don’t qualify for the same TYPE of credit.
But it’s worth pointing out again that Congress really blew it in the way it drafted the revised Home Buyer Tax Credit legislation.
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