Tax credit rewards homebuyers

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Homeowners who were excluded from the federal first-time homebuyer tax credit may have a second chance for a bite at the apple now that the credit has been expanded and extended. As of Nov. 7, 2009, current or recent homeowners who buy a new home can qualify for a tax credit of 10 percent of the purchase price, up to $6,500.

The expanded homebuyer tax credit is intended for “people who diligently have been homeowners and who may be struggling to hang on and need to move down or who are in a position where they could move up because there are some great buys, but they just can’t quite do it,” says Allyson Bernard, owner of Real Estate Professionals of Connecticut.

Rules and tips for repeat homebuyers:

1. Homeowners don’t have to sell their current or former principal residence to take the credit. That home can be rented out, occupied by friends or family members, or even left vacant. But they must enter into a binding contract to purchase a new home on or before April 30, 2010, and they must close that deal on or before June 30, 2010.

Those deadlines might be a challenge for buyers who need to sell their current home before they can buy another one, says Ann Pettijohn, a broker at Oaktree Realtors, in Orange, Calif.

“It takes a little longer to sell a property now. They ought to be thinking about that, so they can get their house into escrow, so they can feel confident to go out and put an offer on another one,” she says. “They need get their house on the market, price it right and have it in excellent condition.”

2. Homeowners who owe more on their mortgage than their home is worth should be aware that lenders typically take many months to approve a short sale, in which the lender agrees to accept less than the total amount owed. Consequently, homeowners who need to arrange a short sale before they can buy another home may not be able to meet the deadlines for the homebuyer tax credit.

3. Buyers must occupy their newly purchased home as their principal residence for at least 36 months. If they move out sooner than that, they’ll have to repay the entire tax credit to the federal government when they file their tax return for the year in which they vacate the home.

5. U.S. military personnel, U.S. Foreign Service employees and federal employees who work in intelligence agencies are allowed an extra year in which to buy a home and are exempt from the 36-month payback rule if they move out of the home due to a qualified official period of extended duty.

6. The purchased home can cost more or less than the existing home, but not more than $800,000. That means homeowners can move up to a more costly home or trade down to a more modest one to meet their needs.

7. Buyers must have owned and occupied a principal residence for at least five consecutive years during the eight-year period that ends on the day the new home is purchased. For example, if the new home was purchased on March 30, 2010, the eight-year period would have started April 1, 2002, and ended March 30, 2010. If the homebuyers are a married couple, both spouses must meet this test to qualify for the tax credit.

This rule effectively restricts the use of the tax credit to established homeowners who currently own or recently sold a home.

Some newer homeowners may object to that restriction, but Patti Ketcham, owner of Ketcham Realty Group in Tallahassee, Fla., is among those in the Realtor ranks who believe the restriction is reasonable.

“I am just delighted that they said you have to (own and live in that home) for five years because I think that’s healthy,” she says.

8. The full tax credit is subject to income limits of $125,000 for individuals and $225,000 for married couples who file a joint tax return. A partial proportional credit can be taken by individuals whose income is more than $125,000, but less than $145,000 and married couples whose income is more than $225,000, but less than $245,000. “Income” in this context means the taxpayer’s modified adjusted gross income, or MAGI, as defined by the Internal Revenue Service.

9. Buyers should consider the best use of the tax credit, whether it is the full $6,500 or a lesser amount due to the income limitations or modest cost of the home. Bernard suggests that that best use may be to remodel part of their new home so their purchase criteria can be more flexible.