BOWES Real Estate Blog

The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence.  The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010.  However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.

For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.

The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.

The following questions and answers provide basic information about the tax credit.  If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

Who is eligible to claim the $8,000 tax credit?

• First-time home buyers purchasing any kid of home – new or resale – are eligible for the tax credit.  To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010.  For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.  A limited exception exists for certain contract for deed purchases and installment sale purchases.  See the IRS website for more detail.
• However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.
• Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.

 What is the definition of a first-time home buyer?

• The law defines “First-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase.  For married taxpayers, the law test the homeownership history of both the home buyer and his/her spouse.

 How is the amount of the tax credit determined?

• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

 Are there any income limits for claiming the tax credit?

• Yes. For sales occurring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return.  The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return.  The phaseout range for the tax credit program is equal to $20,000.  That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGI between these amounts.

 If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

• Possibly.  It depends on your income.  Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

 How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?

• The tax credit’s income limits were increased, the documentation requirements were tightened, and the program’s deadlines were extended.

 What types of homes will qualify for the tax credit?

• Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000.  This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.  The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
• It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members.  Please consult with your tax advisor for more information.  Also see IRS Form 5405.

 I read that the tax credit “refundable.” What does that mean?

• The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset.  Typically this involves the government sending the taxpayer a check for a portion or even the entire amount of the refundable tax credit.

 Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?

• Yes.  Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding.  Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay.  This money can then be applied to the downpayment.
• In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds.  As a result, some state housing finance agencies have introduced programs that provide short-term second mortgages loans that may be used to fund a downpayment.  Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community.  To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit.  The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.

 HUD is now allowing “monetization” of the tax credit.  What does that mean?

• It means that HUD allows buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund.  These funds may be used for certain downpayment and closing cost expenses.
• Under HUD’s guidelines, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans of up to $8,000.  The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.

This entry was posted on Sunday, November 15th, 2009 at 9:10 am and is filed under Advice for Buyers. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.