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.
- A buyer who earns no taxable income or doesn’t owe any federal income tax can still qualify for the tax credit and can file a tax return just to claim it.
- The tax benefit is not a deduction, but rather a refundable credit. That means a homebuyer could receive a refund check from the federal government up to the full amount of the credit.
- An unmarried homebuyer or at least one spouse of a married couple must be at least 18 years old to qualify for the tax credit.
- Individuals who are claimed as a dependent on someone else’s tax return cannot qualify for the homebuyer tax credit.
- Nonresident aliens, as defined by the IRS, cannot claim the tax credit.
- Housing agencies in some 19 states offer qualified homebuyers short-term second mortgages that can be used to “monetize” the tax credit and apply the money to a down payment or closing costs. The National Council of State Housing Agencies, or NCSHA, in Washington, D.C., has compiled a state-by-state list of these programs. These loans may charge little or no interest and can be repaid with a tax credit refund, according to the NCSHA.
- Buyers who move out of the home within 36 months must repay the tax credit in full on that year’s federal income tax return. Certain U.S. military personnel, U.S. Foreign Service employees and federal employees in the intelligence community who move out of the home due to qualified official extended duty outside of the U.S. are exempt from this rule.
- Certain U.S. military personnel, U.S. Foreign Service employees and federal employees in the intelligence community get an extra year to buy a home. They must enter into a contract by April 30, 2011, and close by June 30, 2011, to qualify.
- Three Web sites that offer some useful information about the tax credit are the IRS Web site at IRS.gov, the National Association of Realtors Web site at Realtor.org and the National Association of Home Builders Web site at FederalHousingTaxCredit.com.