Definition of 'first-time'
OK, you bought a home within the qualifying dates. You've decided you want to claim the tax break on your 2008 return. Now you must make sure you qualify.Although the tax break is called the First-time Homebuyer Credit, the tax definition of first-time buyer isn't as straightforward as you might think.
According to the IRS, a first-time buyer is a person who has not owned a primary residence within the past three years. If you and another person buy the house together, each of you must be eligible.
The same rule applies to married couples, meaning each spouse must meet the three-year no-homeownership rule separately. "You cannot get around it by a husband owning a house before marriage and then putting your new home in just the wife's name," says Scharin. "The ownership rule still applies so they're ineligible."
However, owning a vacation home a few years before your new residential purchase is not a problem. The law only stipulates that owning a primary residence in that period disqualifies you for the credit.
Income limitations
Another qualification hurdle that must be overcome is the limit on earnings.The credit, both the original version and the one expanded for 2009 home purchases, begins to phase out for individual taxpayers whose modified adjusted gross income is more than $75,000 or $150,000 for couples filing a joint return.
Once taxpayer earnings top $95,000 for single filers or $170,000 for couples filing jointly, there is no credit.
Stay or pay
Finally, regardless of whether you claim the original $7,500 credit or the $8,000 amount now available, you could be forced to pay back the money if you don't live in your first home long enough.If you claim the $7,500 credit for a property purchased in 2008 and stop using the property as a main home before your 15-year payback period is up, then you must send in the outstanding balance in full when you file your tax return for the year that such an occupancy change occurred.
And although the $8,000 credit for first homes purchased in 2009 does not technically have to be paid back, to get this benefit you must live in the home as your main residence for at least three years. If you don't, you must repay the credit by including it as additional tax on your return for the year in which you stopped using the property as your main residence.
There are some exceptions to the payback rules for both versions of the First-time Homebuyer Credit when it comes to specific home-sale situations. Details and examples are included in the Form 5405 instructions.