First-Time Homebuyer Tax Credit

January 13, 2010

FOR SALE - When referring to the sale of a house, these words can be a bit unsettling even in the best of economic times. The words harbor the fear of the unknown. Will the house sell? Will I have to pay two mortgages? Will I get a price that fits into the range that I want or need to move on?

 

In today's current economic climate where people are losing jobs and cutting back, the number of new homebuyers has decreased drastically and the uncertainty in the housing market has increased. Congress noted that people were reluctant to purchase a home, and in an effort to spur the economy, Congress created tax credits to encourage homebuyers.

 

For homes purchased in 2008, the Housing and Economic Recovery Act of 2008 established the first tax credit for first-time homebuyers (defined as a buyer who has not owned a primary residence during the three years up to the date of purchase). This credit was similar to a no interest loan of $7,500, and it is to be repaid in fifteen equal installments beginning in 2010.

 

The American Recovery and Reinvestment Act of 2009 expanded upon this by increasing the amount of the credit to $8,000 for purchases made before December 1, 2009, by a first time homebuyer. A first time homebuyer is an individual (and if married his or her spouse) who has no present ownership interest in a principal residence in the prior three year period ending on the date of the home purchase. For homes purchased in 2009, the credit must be repaid only if the home ceases to be the taxpayer's main residence within a three year period following the purchase.

 

Other requirements to claim the credit are the following:

• Modified adjusted gross income must be below $75,000 for single taxpayers or $150,000 for joint filers. Reduced credits are available for those taxpayers with modified AGI's between $75,000 - $95,000 for single filers or $150,000 - $170,000 for joint filers.
• For homes purchased in 2008, if you were eligible for the District of Columbia first-time homebuyer credit, then you are ineligible for the federal credit.
• For homes purchased in 2008, your home financing cannot come from tax-exempt mortgage revenue bonds.
• The purchaser cannot be a nonresident alien.
• The home must be located in the U.S.
• The home cannot be sold before the end of the year of purchase.
• The home cannot be acquired through gift or inheritance.
• The home cannot be purchased from a related person.

 

Finally, on November 6, 2009, the Worker, Homeownership and Business Assistance Act of 2009 extended and expanded the first time homebuyer credit. The new law extended the time of purchase (entering into a binding contract) from prior to December 1, 2009, to on or before April 30, 2010 with a closing prior to June 30, 2010. The most significant change, however, was the addition of a "long-time resident" credit of up to $6,500.  A "long-time resident" is a buyer who has owned the same home as a principal or primary residence for at least five consecutive years of the eight year period ending on the date of purchase of a new home as a primary residence. The expanded law also raises the income limitations for purchases after November 6, 2009, to $125,000 for single filers (with reduced credits available for modified AGI's up to $145,000) and $225,000 for joint filers (with reduced credits available for modified AGI's up to $245,000). Several new restrictions were also enacted with this law:

1. Dependents are not eligible to claim the credit
2. No credit is available if the purchase price of a home is more than $800,000
3. A purchaser must be at least 18 years of age on the date of purchase.

 

By establishing these credits, Congress is hoping to encourage taxpayers to purchase new homes and to remove a little bit of the fear associated with the "FOR SALE" sign. Because the credit is fully refundable, the credit reduces the tax due dollar for dollar and can be refunded even if a taxpayer owes no tax or the credit is more than the tax owed. In order to get the money into the taxpayers' pockets quicker, taxpayers who purchase a qualifying home in 2010 have the option of claiming the credit on their 2009 or 2010 return. Furthermore, it should be noted that it is necessary to attach the closing statement on the house to the tax return to support the credit. Please do not hesitate to contact your 415 Advisor, 330-492-0094, to help you determine if you are eligible for these credits.

by: Laurel L. Lusk, CPA

 

 

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