Welcome to another stimulus edition. Now that The Worker, Homeownership, and Business Assistance Act of 2009 extended the home buyer tax credit through April 30, 2010, offering specifically a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence, and a tax credit of up to $6,500 for qualified repeat home buyers, it is time to look at the details. This home buyer tax credit extension applies on a binding real estate contract signed between January 1, 2009 and April 30, 2010. But you must close by June 30, 2010 to qualify with very few exceptions. This credit sometimes is mistakenly called home owner tax credit.
The $8,000 tax credit for first-time home buyers or newbies, no offense intended is the main topic. There is little difference among the key points between the tax credits for first time buyers and repeat homeowners. We will touch the latter in the end. Understand that, the $8,000 is the maximum stimulus you can get. The defined tax credit is 10% of the home purchase price. So if you buy a property for $55,000, all you get is $5,500. And if you buy a property for $300,000, you only take credit of $8,000. Also understand the following -
Whatever the size of the credit you get, it must be repaid over a 15 year period, interest free. Normally, it should be repaid in 15 equal annual installments beginning with the 2nd tax year after the year the credit is claimed. The repayment amount is included as an additional tax on your income tax return for that year. So, if you properly claim an $8,000 first-time home buyer credit on your 2009 return, you will begin paying it back on your 2011 tax return by $533 payments due each year from 2011 to 2025.
2009 and 2010 income limits
If you signed purchase contract after November 6, 2009, you will get full credit if your Modified Adjusted Gross Income (MAGI) is no more than $125,000 as single taxpayer or $225,000 as a married couple filing jointly. This is a decent increase from respective $75,000 and $150,000 incomes. Obviously, government realized they need to give this incentive to more potential home buyers. If your MAGI exceeds $125,000 or $225,000, the tax credit phases out proportionally up to $145,000 or $245,000 respectively, meaning that whoever makes more than these last two figures, gets nothing. Basically, for every $1,000 in extra income, you loose $400 in tax credit. See Adjusted Gross Income vs. Modified Adjusted Gross Income for details.
Home buyer tax credit definition of first time home buyer
To be considered as first time buyer, you have not owned a principal residence in the last 3 years prior to the purchase. If you are married, neither you nor your better half could own a primary residence in these 3 years. If you own a rental or a vacation house, you are the first time buyer.
How to claim the stimulus tax credit
Claim the tax credit on your federal income tax return by completing IRS Form 5405 to determine exactly what you get. For 2009, claim your amount on line 67 of the 1040 income tax form. You must attach a copy of the HUD-1 settlement form from your closing as proof of the completed home purchase. That is all.
Home types qualifying for this tax credit extension
As long as the property is purchased for no more than $800,000 and is intended to be used as a principal residence, anything will do, even mobile homes and houseboats
Can I buy a house from my relatives?
No if you want your tax credit. You can buy it neither from your ancestors like parents, grandparents, nor lineal descendants like children, grandchildren. You can not buy it from your spouse and spouse relatives.
It seems, you can buy it from your siblings and their children, but do consult with your tax guru.
Can I claim tax credit if I pay little or no federal income tax?
Yes, if you are a bum or do not believe in paying federal taxes (ya try that) but otherwise qualify, our government will be sending you a check for a portion or the whole amount. Let say, you are liable for $3,000 in federal income tax, and already had $2,000 tax withheld for the year. Then by April 15th, without the home buyer tax credit, you owe the IRS $1,000. If you somehow manage to buy the house and qualify for the $8,000 home buyer tax credit, you get cool $7,000 check, $8,000 minus the $1,000 owed.
Buying vs. building
If you own a lot and are building the primary residence, you still qualify for the home buyer tax credit. Such a house is treated as purchased on the date you first occupy it. The date of first occupancy must be on or after January 1, 2009 and on or before April 30, 2010 or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010. Eligibility for the tax credit for the newly-built homes purchased from a developer is determined by the settlement date.
Tax credit is not a tax deduction
First time home buyers tax credit of 2009 is a dollar-for-dollar reduction of what you, the taxpayer owe. If you owe $8,000 in income taxes but receive an $8,000 tax credit, you would owe nothing to the IRS. If you owe $5,000, then $3,000 are yours to keep.
A tax deduction is subtracted from your taxable income. If you are in the 15% tax bracket and owe $8,000 to IRS, with an $8,000 deduction, your tax liability would be reduced by $1,200, which is 15% of $8,000, so you owe $6,800 instead of $8,000.
How else can I use my credit?
U.S. Department of Housing and Urban Development or simply HUD allows you to use FHA insured mortgages by applying the anticipated home buyer tax credit toward the home purchase immediately rather than waiting until you file 2009 or 2010 income taxes to receive a refund. You can use it towards and above the FHA 3.5% down payment and closing costs. Under HUD guidelines home buyers can get short-term loans of up to $8,000 or longer term loans secured by second mortgages.
Applying first time home buyer credit to different years
You are qualified for the tax credit and buy a home in 2009 or 2010. You then can choose to apply the tax credit against respectively your 2008 or 2009 tax returns. The law permits treating qualified home purchases in 2009 or 2010 as if the purchase occurred respectively on December 31, 2008 or December 31, 2009. But this means that the previous year MAGI applies. A benefit of such an election is that purchasing a house in 2009 or 2010, you will know prior year MAGI with certainty. Do not forget that you submitted the tax return for the previous year, and would have to file an amended return to claim the credit using Form 1040X.
Exceptions on repayment rule
If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay the remaining half.
If you stop using the home as the primary residence, all remaining annual installments become due on the tax return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Consult a professional to determine the tax consequences.
If you sell your home, all remaining annual installments become due on the tax return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Consult a professional to determine the tax consequences of a sale.
If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.
Tax credit for existing homeowners
Also called move-up or repeat home buyers, these tax payers are entitled to $6,500 tax credit when purchasing a principal residence after November 6, 2009 and on or before April 30, 2010. You can complete the purchase by June 30, 2010 as long as you have a binding sales contract signed by April 30, 2010.
Who qualifies as a repeat home buyer
The home buyer tax credit act of 2009 defines a tax credit qualified, move-up home buyer as a home owner who has owned and resided in a home for at least 5 consecutive years of the 8 years prior to the purchase date. For married taxpayers, the law tests the home ownership history of both the home buyer and the spouse. As a repeat home buyer you do not have to purchase a more expensive home than your previous/existing home to qualify for the tax credit.
Either tax credit can be given to a non U.S. citizen
As long as you qualify as a nonresident alien under the IRS definition and meet the income limits. If married, the spouse has to qualify and meet income limits as well. For this and all other details on home buyer tax credit see IRS website.
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