The government has passed a home buyer tax credit that will apply for homes in contract by April 30, 2010 and closed by June 30, 2010. Unlike the “first-time home buyer tax credit” that was available for much for 2008 and 2009, this new tax credit is available to both first-time home buyers and home buyers who have previously owned and lived in their own home for five consecutive years out of the last eight years.
Because we get a lot of questions about the tax credit, and because this program is such a tremendous opportunity and incentive for so many home buyers, we want to provide you with a thorough explanation of the program. What you’ll find here is a “Tax Credit At-A-Glance” summary of the program, an Overview of, a Frequently Asked Questions section, and a review of various Scenarios that represent common situations home buyers will face.
If you have any questions about the program, feel free to email us and we’ll get a response to you. But we should also advise you that if you think you might qualify for the tax credit, you should discuss the matter with your accountant, who can properly advise you about your particular situation.
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:
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.
Here are some answers to Frequently Asked Questions about the Home Buyer Tax Credit
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?
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?
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?
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?
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?
Yes. So long as she lives in one of the units for at least three years, she gets the credit.
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.