Since 2016, a tax amendment has been in the works in DC that has the potential to save first-time homebuyers thousands of dollars in closing costs. The “First-time Homebuyer Tax Benefit Amendment Act of 2016” awaits only the signature of Mayor Muriel Bowser to be enacted into the DC code. But the new law does not entail automatic implementation. Buyers will need to prove their eligibility for the tax benefit by filing a “First-time Homebuyer Affidavit”, the details of which are still being hammered out.

The District has assigned the drafting of the “First-time Homebuyer Affidavit” to the District of Columbia Land Title Association (DCLTA). As a Board member of the DCLTA, Prime Settlement’s Owner and President Scott Sweitzer has been intimately involved with this process. Here’s the inside scoop on what real estate professionals need to know so far.

First, what is the “First-time Homebuyer Tax Benefit Amendment Act of 2016”?

The amendment is designed to reduce the rate of the District of Columbia Deed Recordation Tax for first-time homebuyers in Washington, DC. This is an excise tax that homebuyers pay to the Office of Tax and Revenue (OTR) Recorder of Deeds to have documents related to a property’s purchase registered in the city’s records. Due prior to the registration of these documents, this essential procedure makes up part of the closing costs and is often the highest line item among those costs.

For eligible first-time homebuyers, the amendment would reduce this tax from 1.1% (for sales of $399,999 and lower) or 1.45% (for sales of $400,000 and higher) to just 0.725%. So for example, the sale of a $500,000 condo in DC to a first-time homebuyer would usually entail a recordation tax of $7,250. Following the amendment, this tax would be cut in half to just $3,625.

Who is eligible?

As per the draft of the law, “the phrase ‘first-time District homebuyer’ means an individual who has never owned eligible property as the individual’s principal residence.” This also includes individuals who are divorced or separated and did not obtain ownership of a principal residence that had previously been jointly owned. Beyond that definition, the key requirement for eligibility is having “a household income no higher than 180% of the Area Median Income (AMI) as defined by the US Department of Housing and Urban Development.”

The 2016 AMI for Washington, DC, was $108,600. So to be eligible, a first-time homebuyer would need to have an income of $195,480 or less. Lastly, it should be noted that the law only applies to the purchase of residential properties within the District.

When will the amendment become law?

While the main text of the amendment was drafted in February of this year, once the Recorder of Deeds completes the final wording, it will go to the Mayor for her signature. We should expect to see it enacted within the next 6 to 9 months.

Once enacted, the tax benefit will remain in effect for the next five years, after which the provisions of the law stipulate that the mayor prepare a report on the benefit’s impact on home sales, homeownership, and housing affordability in the District. And of course, there is always the possibility of the law being renewed.

How can homebuyers demonstrate their eligibility?

To qualify for this tax reduction, first time homebuyers in DC will need to complete the “First-time Homebuyer Affidavit” through which they legally acknowledge conformity to each of the benefit’s requirements. They will also need to submit other proof-of-eligibility documentation, such as proof of DC residence and evidence of meeting the income requirements, to The Office of Tax and Revenue (OTR) Recorder of Deeds the entity responsible for collecting the Recordation Tax.

As things currently stand, OTR has placed proof of eligibility on the title company involved in the transaction. It would be incumbent on companies such as Prime Settlement to submit the proper evidence of a buyer’s eligibility to the Recorder of Deeds. However, given the liability involved, including lack of expertise validating District identity documents, not everyone in the settlement industry agrees that this is the best approach.

We’re committed to ensuring the most efficient implementation of this amendment for the homebuyers it stands to benefit. Considering the potential savings involved, the amendment promises to be an important factor for many first-time homebuyers in DC, and the more streamlined the implementation, the greater the impact it will have.

No matter what the outcome, this amendment promises to be a wonderful benefit for new homeowners in DC. Sure, there may be some additional paperwork involved, but as with any home purchase, real estate professionals and buyers alike can rely on us to know the details inside and out to facilitate a smooth transaction.

We welcome any questions you may have in relation to the benefit or the affidavit. Sign up for our newsletter to get the latest on this and other DC area real estate developments.

Leave your questions or comments below, or call (202) 559-1651 or email us at info@prime-settlement anytime to discuss this topic further.