Better Homes and Gardens Rand Realty Guide to the Home Buyer Tax Credit

Home Buyer Tax Credit At-A-Glance

Home Buyer Tax Credit Overview

The home buyer tax credit provides a credit of up to $8,000 for first-time home buyers and $6,500 for qualified “repeat” buyers who are in contract to purchase a home by April 30, 2010 and close by June 30, 2010. A number of restrictions and conditions apply, particularly with regard to qualifying income levels, so please read through this overview very carefully.

Basic Qualifications

The tax credit applies to both first-time home buyers, and to certain people who have previously owned their own homes.

To qualify for the first-time home buyer tax credit, you cannot have owned a home as your primary residence within the three years prior to closing on your new home. If you owned a home more than three years ago, you technically qualify as a “first-time home buyer.” Similarly, even if you own real estate, you can still qualify as a first-time home buyer if you haven’t lived in that piece of real estate as your principal residence within the past three years.

To qualify for the repeat or “step up” buyer tax credit, you must have owned a home that you used as your principal residence for at least five consecutive years out of the eight years prior to closing. The purpose of this qualification is to allow people who have legitimately lived in and owned their principal residence to claim the credit, while preventing investors or other speculators from getting the credit. This qualification is interpreted very literally, so if you have only lived in the house that you own for the last four years, you will not qualify. The program does not, though, require that you sell your current residence, so you could buy a home to get the tax credit, so long as you live in the new home as your principal residence. You could then rent out your current residence. Also, the law does not require that your new home be more expensive than your old home – the term “step up” buyer does not mean that you have to step up in purchase price.

Any type of residence qualifies for the tax credit: single family homes, condominiums, cooperative apartments, and multi-family homes so long as you are going to use part of the home as your principal residence. The tax credit also applies to house boats, trailers, and mobile homes so long as they are not motorized.

Income Qualifications

The tax credit is only available to people whose incomes are below certain thresholds. The same thresholds apply to both first-time home buyers and repeat buyers. To get the full credit, the home buyer’s “modified adjusted gross income,” or “MAGI,” must be below $125,000 for those filing singly, and below $225,000 for joint filers.

What is your MAGI? The IRS defines MAGI as your “Adjusted Gross Income” (or AGI) plus certain amounts of foreign owned income (which most people don’t have). Your AGI is simply your total income for the year (wages, salaries, interest income, dividends, and capital gains) minus certain adjustments and deductions, but before the itemized deductions on Schedule A of your tax return and your personal exemptions. If you are uncertain about your MAGI or AGI, you should talk to your accountant.

If your MAGI is within $20,000 of those income limits, you can qualify for a partial tax credit. Essentially, you get a proportionate amount of the credit for the proportionate amount of income you have in that $20,000 range. For example, if your MAGI is $135,000 as a single filer, that means you’re $10,000 into that $20,000 range, which is 50% of the range, so you’d get 50% of the tax credit – or $4,000 (for first-time home buyers) or $3,250 (for repeat buyers).

Deadlines

In order to claim the tax credit, you have to be in contract on your purchase by April 30, 2010, and close by June 30, 2010. These are hard deadlines, so if you come close to the deadline be prepared for last-minute delays that might endanger your eligibility.

You can get the tax credit even if you were already in contract at the time the law was passed. It doesn’t matter when you went into contract, so long as you are in contract by April 30, 2010 and close by June 30, 2010. So if you got into contract in July 2009 without any idea that you might get a tax credit, you can still claim the tax credit (if you are otherwise qualified) if you close by June 30, 2010.

For those people buying new construction properties, you can qualify for the tax credit if you are in contract and close on the new construction by the deadline dates. However, if you are building the home yourself, you have to move in by the deadline date.

How the Tax Credit Works

The home buyer tax credit is 10% of your home’s purchase price, up to $8,000 for first time home buyers or $6,500 for repeat buyers. The tax credit is a dollar-for-dollar reduction in the amount of tax you have to pay the government. So if on your return you would owe the IRS $20,000 in income taxes, and you qualify for the full $8,000 tax credit, you would get to reduce your taxable burden from $20,000 to $12,000. Indeed, even if you don’t owe any taxes for the tax year, you would then get a refund for the full tax credit.

Note that the tax credit works very differently from the home interest tax deduction that all home owners can enjoy. A tax deduction reduces your taxable income, not your taxes owed. So if you paid $30,000 in mortgage interest in the tax year, and your income was $100,000, your income would be reduced by $30,000 to $70,000. That’s very good, because it means that you don’t have to pay taxes on that $30,000 – your taxable income goes from $100,000 to $70,000. Depending on your applicable tax rate, that could save you thousands of dollars in taxes owed, but it’s not the same dollar-for-dollar reduction as in a tax credit.

In order to claim the tax credit, you will have to fill out IRS Form 5405 to determine your tax credit amount and eligibility, and then apply the credit on line 67 of your 1040 federal tax return. If you close on your home in 2009, you can claim the tax credit on your 2009 return filed by April 2010. But you can also claim the tax credit on your 2008 return if you want to file an amended 2008 tax return – talk to your accountant if you want to do that. Similarly, if you close in 2010 (prior to the June 30, 2010 deadline), you can claim the deduction on your 2009 return (if you close by the time you file your return) or as an amended 2009 return.

Other Restrictions

Although we have covered the basic qualifications, the tax credit also has a number of restrictions that limit its applicability:

• You cannot get the credit if you purchase the home from a close relative, such as your parents, siblings, spouse, or children, or anyone in your direct lineal descent or ancestry. The government is trying to prevent sham transactions between relatives designed to simply generate the tax credit.
• You cannot get the credit if you buy a home that costs more than $800,000.
• You will have to pay back the credit if you sell or move out of the qualifying home within three years after closing.
• You cannot be under the age of 18, or claimed as a dependent on someone else’s tax return.

Conclusion

We hope that this review is helpful. If you have any questions about this material, please contact your Better Homes and Gardens Rand Realty agent.

Home Buyer Tax Credit Frequently Asked Questions

Here are some answers to Frequently Asked Questions about the Home Buyer Tax Credit

Basic Qualifications and Conditions

Q. What are the basic eligibility requirements for a first-time home buyer?

To qualify as a first-time home buyer, you cannot have owned a home that was your principal residence in the three years prior to closing.

Q. What are the basic eligibility requirements for repeat buyers?

To qualify as a “step up” or repeat buyer, you must have owned a home that you lived in as your personal residence for five consecutive years out of the previous eight years prior to closing.

Q. I bought a home once before, so I’m not a first-time home buyer. Can I still get the credit?

A. For the first time home buyer credit, you qualify as a first-time home buyer so long as you have not owned a primary residence in the past three years prior to closing on your new property. If you owned a home before, you can still qualify as a “step up buyer” or “repeat buyer” under the program if you lived in that home that you owned for five consecutive years out of the previous eight years prior to closing.

Q. Does my condo/coop/multi-family/etc. qualify?

A. Yes, the legislation takes a very broad view of a qualifying home. Condos and cooperative apartments qualify. So do multi-families, houseboats, or mobile homes and trailers that do not have motors.

Q. Can I get the credit if I buy a multi-family home, and rent out the units I am not using as my principal residence?

If you otherwise would qualify for the credit, you can get the credit even if you are renting out part of the property, so long as you use part of the property as your principal residence. However, the purchase price of the home will be allocated proportionately among the units, so it might be that you would not get the full credit is the proportional value of your principal residence is less than $80,000 for first-time home buyers, or $65,000 for repeat buyers– since the credit is 10% of the value.

Q. What if I owned a vacation home in the past three years?

Owning a vacation home, or an investment property, does not disqualify you for the first-time home buyer tax credit if you did not use that property as your primary residence.

Q. Can I get the repeat buyer credit if I otherwise qualify, even if I don’t sell my previous home?

Yes, the law does not require that you sell the home that you lived in for five consecutive years out of the last eight years. You can keep title to it. However, you have to make the qualifying home your principal residence, so you can’t live in the prior home.

Q. Does it matter how expensive the home is?

The only restriction is that the home cannot cost more than $800,000, which is unlikely for purchasers at the income levels that have been set.

Q. How long do I have to live there?

You lose a piece of the credit if you sell or you move out of your home before three years. But you shouldn't be buying if you're planning on moving again in less than three years anyway.

Q. Can I get the credit if I buy the home from a relative?

No, the government is trying to prevent “sham transactions” in which one relative “sells” a home to another to generate the credit. Purchases from your spouse, brothers, sisters, parents, grandparents, your children, your grandchildren, and your spouse’s family members (brothers, sisters, etc.) do not qualify.

Q. If I am a repeat buyer who otherwise qualifies, do I have to buy a more expensive house to qualify as a “step up” or “repeat” buyer to get the tax credit?

No. The term “step up” is a term of art, but does not mean that you literally have to buy a more expensive house than the one that you were in for five consecutive years out of the last eight.

Q. Can I still get the credit if I am building a new construction house?

You can get the credit for new construction. If you are building the house yourself, the date of “purchase” for purposes of the tax credit is the day you occupy your new home, which means you have to move in by June 30, 2010. If a builder is building the house for you, the date of “purchase” will be the date of closing with the builder, which again must be by June 30, 2009.

Q. What if I qualify for the credit, but my spouse does not qualify because she previously owned a home?

Unfortunately, for a married couple to claim the credit, both spouses must qualify. So if you are a married couple and one of you does not qualify for the tax credit, neither of you can claim it. This can come up because one of your does not qualify as a first-time home buyer, or one of you does not qualify as a repeat buyer. This rule applies even if you file separately.

Q. What if I qualify for the credit, but my girlfriend does not qualify, and we are buying the property together.

If you are an unmarried couple, you can allocate the credit to the partner who has not owned a home, and who otherwise qualifies for the tax credit. So you can get the entire credit, so long as you allocate the credit to yourself.

Q. Can I get the credit if I buy a home outside the United States?

No, only homes in the United States qualify.

Q. Can I get the first-time home buyer credit if I owned a home outside the United States within the past three years?

No, you would not qualify as a first-time home buyer if you owned a home anywhere.

Income Qualifications

Q. What income level qualifies me for the tax credit?

The government has only made the tax credit available for people with incomes below certain thresholds: up to $125,000 for single filers and $225,000 for joint filers. It's the same for both first-timers and repeat buyers. If you make more than that, then the credit will phase out.

Q. What is my “modified adjusted gross income” or MAGI, which is the basis for the income restrictions?

The IRS defines MAGI as your “Adjusted Gross Income” (or AGI) plus certain amounts of foreign owned income (which most people don’t have). Your AGI is simply your total income for the year (wages, salaries, interest income, dividends, and capital gains) minus certain adjustments and deductions, but before the itemized deductions on Schedule A of your tax return and your personal exemptions. You can find your AGI on Form 1040 and 1040A as the last number on page 1 and the first number on page 2, or on the Form-EZ as line 4.

Q. What if my income is in that range between $125,000 and $145,000 where I get a partial credit? How is the partial credit figured?

Essentially, you get a proportionate amount of the credit for the proportionate amount of income you have in that $20,000 range. For example, if your MAGI is $135,000 as a single filer, that means you’re $10,000 into that $20,000 range, which is 50% of the range, so you’d get 50% of the tax credit – or $4,000 (for first-time home buyers) or $3,250 (for repeat buyers).

Deadline Issues

Q. What are the deadlines for buying a home that would qualify for the credit?

You have to close on your qualifying purchase by June 30, 2010, and you have to be in contract on that purchase by April 30, 2010.

Q. Can I get the credit if I entered into a contract before the new tax credit was enacted on November 6, 2009, but I haven’t closed yet?

Yes, the law does not require that you go into contract after the effective date. So long as you close after the date the law goes into effect, and before June 30, 2010, and you otherwise qualify, you'll get the tax credit.

Q. I closed on my home prior to November 6th, 2009, and was not eligible for the tax credit at the time, but I qualify under the new income guidelines. Can I claim the credit?

Unfortunately, no. The new income restrictions only apply to closings after November 6, 2009.

Tax Issues

Q. Can I still get the mortgage tax deduction if I take the credit?

Yes . The tax credit does not affect your eligibility for the home interest mortgage deduction.

Q. How is a tax credit different from the home interest mortgage deduction that all homeowners get?

A tax deduction is a great thing, but a tax credit is even better. A tax credit is a dollar-for-dollar reduction in the amount of tax you have to pay the government. So if on your return you would owe the IRS $20,000 in income taxes, and you qualify for the full $8,000 tax credit, you would get to reduce your taxable burden from $20,000 to $8,000. In contrast, a tax deduction reduces your taxable income, not your taxes owed. So if you paid $30,000 in mortgage interest in the tax year, and your income was $100,000, your income would be reduced by $30,000 to $70,000. That’s very good, because it means that you don’t have to pay taxes on that $30,000 – your taxable income goes from $100,000 to $70,000. Depending on your applicable tax rate, that could save you thousands of dollars in taxes owed, but it’s not the same dollar-for-dollar reduction as in a tax credit.

Q. Can I apply my 2010 closing purchase to my taxes for 2009 that I’ll file by April 2010?

Yes, if your 2010 purchase qualifies for the tax credit, you can claim the credit on your 2009 return, either on your return by April 15, 2010 or on amended return filed after that date. Call your accountant.

Q. Can I apply my 2009 closing purchase to my taxes for 2008 that I filed in April 2010?

Yes, if your 2009 purchase qualifies for the tax credit, you can claim the credit on your 2008 return by filing an amended tax return. Call your accountant.

Q. How do I claim the tax credit on my federal income tax return?

You should probably talk to your accountant about this. But if you are looking for the form you use for the credit, it is IRS Form 5405 to determine the tax credit amount, and then line 67 on your 1040 income tax return for your 2009 return. You do not need to get preapproval from the IRS to claim the credit, but you should absolutely consult with your accountant before you claim the credit to make sure you qualify.

Q. Do I get the credit to my state taxes also?

No, the tax credit we are talking about applies only to your federal return.

Q. Can I still get the credit if I don’t owe any federal income taxes?

If you are entitled to a tax credit for your home purchase, you will get the credit whether you owe federal income taxes for the tax year or not. If, for example, you are entitled to the full $8,000 tax credit for first-time home buyers, and you owe only $1,000 in federal taxes for 2009, then you’ll get a $7,000 check from the IRS.

Q. If I am getting an FHA loan, can I get an advance on my tax credit to help pay my closing costs.

Yes, HUD is allowing home buyers who are getting FHA-insured loans to “monetize” their expected tax credit by using the money to cover some closing costs. Check with your lender as to whether you qualify, or whether your lender is allowing for this.

Q. I’m not doing an FHA loan, but I’d like to get some of my tax credit money in advance. How do I do that?

If you want to get some of your credit early, you can adjust your income tax withholding on your W-4 form or your estimated quarterly payments. Also, the IRS allows you to claim the credit toward your 2009 return for the 2008 calendar year if you close by December 31, 2009, if you would have qualified in 2008 under the income guidelines, and you can file an amended tax return to get your credit earlier.

Congress has acknowledged the unique circumstances affecting members of the military, the foreign service and the intelligence community by making the following exceptions that apply to both the $8,000 tax credit for first-time home buyers and the $6,500 tax credit for repeat home buyers.

Military Issues

Q. Are there exceptions to some of these rules for military personnel.

Yes, both with the deadlines, and the payback rules. You must be a “Qualified service member,” meaning a member of the uniformed services of the U.S military, a member of the Foreign Service of the U.S., or an employee of the intelligence community. And you must be on “Official extended duty,” meaning any period of extended duty while serving at least 50 miles away from home for a period in excess of 90 days.

Q. If I am a member of the military, and I am deployed within three years after closing on my qualifying purchase, do I have to pay the credit back?

No, the IRS created an exception for qualified service members who sell or move from a qualifying home within three years due to official extended duty. You don’t need to pay the credit back.

Q. What are the deadlines for qualified service members on official extended duty?

The deadlines of April 30, 2010 for contract and June 30, 2010 for closing have been extended for one full year for qualified service members on a period of official extended duty.

Specialized Scenarios: How does the Tax Credit Apply?

Below, we’ve identified particularly complicated scenarios that illustrate how the tax credit applies in common situations for home buyers. In all these scenarios, assume that the people involved qualify under the income guidelines:

Scenario 1:

Bob Buyer never owned a house before, and signed a contract to buy a $300,000 home in Rockland County in July. His income was too high for the first-time home-buyer contract that was in effect at the time, but he qualifies under the new guidelines. He is supposed to close in mid-November. Does he get the credit?

Answer:

Yes, he qualifies. Under the home buyer tax credit law, it doesn't matter if you are already in contract when the law is passed. The only requirement time-wise is that are in contract by April 30, 2010 and close by June 30, 2010. Bob gets the tax credit, which is a bit of a windfall because he didn't expect it.

Scenario 2:

Bonnie Buyer sold her home that she'd lived in for the past 10 years in July, and bought in August. Does she get the credit?

Answer:

No, she does not get the credit. The credit only applies to closings after November 6, 2009. She closed too early. It's unfortunate that the law does not apply retroactively, but that's the kind of thing that happens when tax laws change.

Scenario 3:

Sally Seller has owned her own home for ten years, and lived in it until last year, when she started renting it out. Can Sally sell her home and buy a new home, and get the tax credit?

Answer:

Yes, she can get the credit. The law requires that she have lived in her primary residence for five consecutive years out of the last eight. She lived in it for nine years consecutively until last year, which means that she lived there for over five consecutive years of the past eight. She gets the $6,500 credit if she sells and buys.

Scenario 4:

Sammy Seller bought his house three years ago, and has lived there the whole time. Can he sell his home and buy a new home with the tax credit?

Answer:

No, he does not qualify for the credit. He's not a first-time home-buyer, since he owned a home within the past three years. And he's not a qualified step-up buyer, since he has not lived in his principal residence for five consecutive years of the past eight years. No credit.

Scenario 5:

Irving Investor owned his own home and lived in it for the last ten years. He also owns a vacation home in Florida. He wants to sell his home, buy a rental apartment for a tenant, and go live in his vacation home in Florida. Can he get the tax credit?

Answer:

No. The tax credit can only be used for principal residences, not investment properties. He'd have to live in his new apartment for three years. But he could buy the apartment and rent out his home. The key is he has to live in his new purchase.

Scenario 6:

Imma Investor owned his own home and lived in it for the last ten years. She wants to sell that home, and buy a four-family house, with the plan on living in one of the units and renting the other three out. Can she get the tax credit?

Answer:

Yes. So long as she lives in one of the units for at least three years, she gets the credit.

Overview of Changes to Home Buyer Tax Credit Legislation 2008-2009

The current home buyer tax credit has its origins in a similar tax credit that was passed in early 2008. The first version of the tax credit was really just an interest-free loan that had to be paid back after fifteen years. That applied to certain qualifying first-time home buyer purchases starting on April 8, 2008, and was scheduled to cover purchases through July 1, 2009.

However, in March 2009, the government enacted a revised first-time home buyer tax credit, making it retroacting to closings after January 1, 2009, expanding the tax credit from $7,500 to $8,000, and eliminating the 15-year repayment requirement. That legislation was designed to cover purchases from January 1, 2009 through November 30, 2009.

Again, though, a third version of the legislation was enacted on November 6, 2009 that expanded the tax credit to cover not just first-time home buyers but certain repeat buyers, raised the qualifying income levels, and extended the credit to closings by June 30, 2010 for transactions in contract by April 30, 2010.

We provide this review because many people might be confused about which legislation applies to their home purchases. As you can see below, the applicable legislation depends on when you closed on your purchase. If you have any questions, please contact us, or discuss the matter with your accountant.