Secrets of the homebuyer tax credit
- The buyer must be at least 18 years old and cannot be a dependent.
- The home cannot be bought from a close relative or cost more than $800,000.
- Special rules help U.S. military, foreign service and intelligence personnel.
The basic rules of the federal homebuyer tax credit are not difficult to figure out. But the credit, which has been amended and extended, also contains more than a dozen little-known twists and traps that can affect whether a buyer will or won't qualify for the full amount of up to $8,000 for first-time buyers or $6,500 for repeat homeowners.
Here are some facts homebuyers should know about the rules that became effective Nov. 7, 2009:
- The amount of the credit technically isn't $8,000 or $6,500, but rather 10 percent of the purchase price of the house up to those amounts for a buyer who hasn't owned a home in the last three years or a homeowner who has occupied the same principal residence for five consecutive of the last eight years, respectively. For example, if the home cost $50,000, the maximum credit amount would be $5,000, not $8,000 or $6,500.
- Buyers can elect to claim the credit on their 2009 or 2010 tax return, whichever is more advantageous for them. Buyers who claim the credit on a 2009 return must file on paper forms, not electronically. Expect to wait 12 to 16 weeks for a refund from an amended 2009 tax return.
- The home may be a detached house, condominium, town house or co-op home or a mobile home, manufactured house or travel trailer that's affixed to land owned or leased by the homeowner. A mobile home or travel trailer that's on the road doesn't qualify.
- If the home costs more than $800,000, the tax credit drops to zero. That means the credit cannot be taken if the home costs more than that amount.
- The home cannot have been bought from a close relative of the homebuyer such as a grandparent, parent, spouse, child or grandchild.
- The buyer can rent out a portion of the home and still claim the tax credit if the home is also the buyer's principal residence.
- The income limits for the full tax credit have been increased to $125,000 for singles and $225,000 for married couples who file a joint tax return, effective Nov. 7, 2009. The higher income limits aren't retroactive. "Income" in this context refers to the homebuyer's modified adjusted gross income, or MAGI, as defined by the Internal Revenue Service. The MAGI might not be equal to the buyer's salary reported on, say, a W-2 tax form.
- Homebuyers whose income is up to $20,000 higher than those limits can qualify for a partial tax credit. For example, a married couple who earned $235,000 could qualify for 50 percent of the $6,500 tax credit, or $3,250, because their income is at the midpoint between the full-credit limit of $225,000 and no-credit limit of $245,000, according to the IRS.