4 questions on $6,500 home tax credit

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Homeowners who want to take advantage of a new home tax credit worth up to $6,500 when they buy a new place have until April 30, 2010, to get a deal under way. Is it time for you to get moving?

Before you decide, see if you can answer “yes” to these four questions.

Are you already in the market?

Let’s assume you qualify for the tax break. That means you’ve been in your current home for at least five of the last eight years consecutively, you’re purchasing a new principal residence — not a vacation home — that costs no more than $800,000, and you meet the income threshold — $125,000 for individuals and $225,000 for joint filers — to get the full $6,500 credit.

The tax credit is yours unless you sell or stop using the home as your principal residence within three years after the date of purchase. Qualified homebuyers also can take the tax credit on their 2009 or 2010 income tax returns.

But the decision to go after it hinges on other factors. For instance, if you were already planning to move, the tax credit can help you recoup some of those repairs you’ve been putting off to get your home ready for sale.

“It’s a benefit if you need or want to move,” says Dorcas Helfant-Browning, past president of the National Association of Realtors, or NAR, and owner of a Coldwell Banker agency in Virginia Beach, Va.

“Those who have been talking about a move for a specific life reason,” such as the desire to upgrade or downsize, to move closer to your children or make room for an aging parent, are the best candidates for the tax credit, she says.

Do local market conditions look favorable?

Helfant-Browning points to three reasons to make the case that now is a good time to buy a new home and upgrade from your current one.

“No. 1, interest rates are as low as they’ve ever been in our lifetime,” Helfant-Browning says. “No. 2, prices are very competitive, and you can buy a lot more home today than you could three years ago. And thirdly, because of the first-time buyer tax credit, the first-time buyers are eating up the good inventory that’s affordable, and that’s good news for sellers.”

But of course, real estate is always all about location. Jim Saulnier, a Certified Financial Planner in Fort Collins, Colo., believes home prices are close to bottoming in many markets, but not all.

Major metropolitan areas in California, Florida and Nevada saw their third quarter 2009 median home prices drop by double-digits from the year-ago period, according to a NAR survey. The worst was Cape Coral-Fort Myers, Fla., where prices plunged by 40 percent. The highest gain — 19.2 percent — was in Cumberland, Md.-W.Va.

“Anybody contemplating doing this must feel strongly that the homes in their area have bottomed or are very close to bottoming,” says Saulnier, who recommends getting advice from a Realtor or an appraiser about how home values are trending in your area. “You don’t want to do a lateral move (or an upgrade) only to be under water in that home a year or two later.”

Can you sell your house in time?

You’ll have to close on your new home by June 30, 2010, although those in the military get an extra year. Because you certainly don’t want to be carrying two mortgages at once, a lot hinges on how fast you can sell your current home. Again, that depends a great deal on where you live.

“There are some (areas) where the lower-priced homes in the market have started to see multiple offers again,” says Mark Foreman, 2009 liaison for the NAR’s law and policy group. “So if you are selling a house that’s in the entry level that’s attractive to homebuyers and is priced right according to the market, the likelihood of you getting that property sold sooner is pretty good.”

Marc Henn, president of Harvest Financial Advisors LLC, in West Chester, Ohio, says sellers who have a house that is unique to their area will probably have the greatest advantage when it comes to selling quickly.

“Let’s say it’s the middle of a subdivision but has a small woods behind it, while the other houses don’t,” Henn says.

Take a look at the recent history of how long it takes to get a “sold” sign up in front of other homes near you.

“If you put your house on the market now, and the average time on the market in your area is 90 to 120 days, you should be OK. But you just want to make sure that you pay attention to that,” Foreman says.

Can you close the expense gap?

While the tax credit can help offset expenses like home repairs and the seller’s commission, $6,500 will only stretch so far. If you are upgrading, you need to make sure you have enough equity and available cash to cover the down payment, Henn says.

Saulnier warns that if you’re counting on the tax credit to cushion the higher mortgage cost of your new home, that’s a red flag.

“In this economy, if they lose their job, the increased mortgage payments could throw them under,” Saulnier says.

While the tax credit can be a financial boost to many homeowners who are ready to buy again, Saulnier insists that the purchase of a home should never be a tax-based decision.

“This $6,500 is just the cherry on the sundae,” he says. “The sundae itself is the historically low home prices, substantially low interest rates (and) sellers willing to bargain.”