What is the Homebuyer Tax Credit and How Does it Work?
Understanding the homebuyer tax credit is a must for any prospective homebuyer. First time homebuyers could be eligible for up to an $8,000 tax credit on homes purchased no later than the spring of 2010. Repeat homebuyers, thanks to recently passed legislation, have the ability to receive up to $6,500 in tax credits.
In this article, we'll explore several facets surrounding the tax credit, including qualification criteria, timelines in which the tax credit can be claimed, and potential benefits. For many consumers in this struggling economic climate, the credit could be a strong contributing factor in the decision to buy a new home.
What exactly is a tax credit? A tax credit will either reduce a taxpayer's federal tax bill, or increase their tax refund, on a dollar to dollar basis. For example, let's say you owe $10,000 on your taxes, but you receive an $8,000 tax credit. After applying the tax credit your tax bill is reduced to $2,000 ($10,000 - $8,000). Alternatively, if you owe $2,000 in taxes - and with the same $8,000 tax credit - you would see a tax refund of $6,000. When the homebuyer tax credit was initially created in 2008, it was treated as a low interest loan - in other words homebuyers were expected to pay back the credit over time. However, legislation passed in 2009 did away with this payback feature - now, homebuyers do not have to pay back the tax credit as long as they continue to use the newly purchased home as their main residence for at least a three year period following the purchase date.
First Time Home Buyer Credit Extended
On November 6, 20009, President Obama signed into law the Worker, Homeownership and Business Assistance Act of 2009. The main purpose of this law was to extend the first time homebuyer tax credit previously created by the Housing and Recovery Act of 2008, which was set to expire on November 30th, 2009. The stated goal of the U.S. government, in creating this tax credit, is to stimulate the housing market and provide a much needed spark to the economy.
With the new law in place, eligible homebuyers can receive a tax credit of up to 10% of the home purchase price, with a maximum credit of $8,000. To claim the credit on their tax returns, homebuyers must purchase, or enter into a binding contract to purchase, a "principal residence" on or before April 30, 2010 and close on the home by September 30, 2010. The term principal residence simply means that, for those people who own multiple houses, the home being purchased will be the one they reside in the majority of the time. A "first time home buyer" is defined as someone who has not owned a principal residence during the three-year period prior to the purchase. For married couples, both spouses must meet this requirement.
Qualifications for First Time Homebuyer Tax Credit
To qualify for the first time homebuyer tax credit per the most recent legislation - the following criteria must be met:
- Homebuyer must not have owned a principal residence during the three-year period prior to the purchase. As mentioned above - if married, both spouses must meet this requirement
- The homebuyer must have a contract in place before April 30th, 2010, and the deal must close before September 30th, 2010 (The law originally stated that the close date had to occur by June 30th, 2010. However, on July 2, 2010, the Obama administration and Congress extended this date until September 30th, 2010.)
- Purchase price of the new home cannot be more than $800,000
- The following income requirements apply: For single tax filers, the credits phase out between $125,000 and $145,000 of modified adjusted gross income. For married couples the range is $225,000 to $245,000. For the average person, modified adjusted gross income equates to the adjusted gross income as reported on their tax returns
- Homebuyers cannot buy a home from a blood relative or descendent - nor may a person claim the credit if the home is purchased from a spouse or the spouse's blood relatives
- The new home must be used as principal residence for at least the next three years after date of purchase.
- Homebuyers may not take the tax credit if they are claimed as a dependent on someone else's return
- First-time homebuyers received a tax credit up to 10% of the home purchase price, with a maximum credit of $8,000
- Homebuyers who purchase their home in 2009 can claim the credit on either their 2008 or 2009 returns, while those who purchase their home in 2010 can use either their 2009 or 2010 returns
- For military, foreign service, and intelligence personnel who are serving outside the U.S. on "official extended duty" for at least 90 days during 2009 and the first four months of 2010, the law allows an extra year to take advantage of the tax credit
Tax Credit for Repeat Homebuyers
The law enacted on November 6, 20009 added a tax credit for repeat buyers. A person who has lived in one residence for five consecutive years during the previous eight years can qualify for a tax credit of as much as 10% of the purchase price, up to a maximum $6,500. The new home does not have to cost more than the old one.
To illustrate this scenario, let's take an example of a person who lived in a home from 2002 until 2007, and then ceased to be a homeowner. Since this person lived in a home for five consecutive years, and this period was in the last eight years, they may be eligible for the $6,500 tax credit if they decide to purchase a new home. The basic qualification criteria from the first time homebuyer tax credit apply.
More information regarding the tax credit can be found at irs.gov. A qualified tax advisor can also be a resource for additional questions and to determine if you qualify.