Thanks to the Worker, Homeownership and Business Assistance Act of 2009, millions more homebuyers will be eligible for money back from Uncle Sam when they file their tax returns via the homebuyer tax credit.
The new law expanded the time frame to purchase a home and get a tax break, for first-time buyers and current homeowners. And while many taxpayers welcome the new move-up or longtime resident option (it goes by either name), many potential buyers also have questions about the homebuyer tax credit.
Here are five common queries we’ve received at Bankrate.
No. 1: Timing your home purchase
I sold my home this year, before the new law took effect. I had lived in it for more than five years and am looking to buy another residence. Will I qualify for the $6,500 homebuyer tax credit?
Sorry, but timing is everything with this credit and yours is just a bit off when it comes to claiming it.
While you meet the requirement that you live in your existing home for any five consecutive years any time within eight years before you buy another principal residence, in the Internal Revenue Service’s eyes you bought too early.
For existing homeowners, the $6,500 credit is limited to homes purchased after the new law took effect, Nov. 6.
No. 2: Co-owner considerations
I will be purchasing a home with someone to whom I am not married. We are applying jointly for the mortgage and will both be living in the home as our primary residence. I qualify for the first-time homebuyer tax credit of $8,000 and my co-purchaser qualifies for the $6,500 credit. Are we each allowed to claim the individual credit for which we qualify?
Sorry, no tax credit double dipping. You can’t get a combined $14,500 credit for your home purchase. When two or more unmarried individuals jointly purchase their principal residence, the total credit allowed all eligible buyers cannot exceed $8,000.
The credit, though, can be split up among all qualifying buyers. In fact, the IRS says when two or more unmarried individuals jointly purchase their principal residence, the qualifying credit amount should be allocated among the purchasers using “a reasonable method.”
This allocation could be splitting the credit amount based on (1) each taxpayer’s contribution toward the purchase price or (2) the taxpayer’s ownership interest in the residence.
You and your co-purchasers should look at the finances involved in the purchase and then run your tax return numbers to see who would benefit more from taking the lion’s share of the homebuyer tax credit. For example, you could allocate $6,500 to your longtime resident co-purchaser and you could claim the remaining $1,500 as a first-time homebuyer. Or it might be more worthwhile for you to claim the $8,000 credit and your joint owner to forgo a claim. Of course in that case, you, as the taxpayer getting the full credit, might want to offer to use those tax savings to buy furniture for your new place.
No. 3: Co-signer concerns
I co-signed a house loan for my parents. I don’t live in the house. My fiancé and I are planning to buy our first home after we’re married this year. Will my name on my parents’ mortgage prevent us from getting the tax benefit for first-time buyers?
What a good daughter! And in this case, the IRS thinks so, too.
In order to qualify for the first-time homebuyer tax credit, the law requires that you not have owned or lived in the property within the three years before buying another home. While as mortgage co-signer you do have an ownership interest in your folks’ house, it is not your principal residence. So you and your future husband should be fine with claiming the credit when you buy your first home as newlyweds.
Essentially, by co-signing your parents’ mortgage but not living in the house with them, their home is a real estate investment for you. The situation is similar to that of a homeowner who rents a property. In that case, the landlord would qualify for the first-time homebuyer tax credit when he buys a place to make his primary residence.
No. 4: Caps, caps, everywhere caps
The income eligibility was increased to $225,000 for couples. Is this amount for first-time buyers and move-up buyers? Is this income cap based on adjusted gross income or just gross income? There also is a cap on the house price eligible for the credit. Is it for first-time buyers and move-up buyers? Was there a house price cap before?
I love people who are interested enough in tax breaks that they pay close attention to the particulars!
First the income limits: If you bought your home under the previous first-time buyer rules, that is the law in place for home purchases between Jan. 1, 2009, and Nov. 30, 2009, you must make no more than $75,000 if you’re a single taxpayer or $150,000 if you’re married and filing jointly. The homebuyer tax credit in these cases is eliminated if you make $95,000 or more as a single filer or $170,000 or more as joint filers. If you make between the two income limits for your filing status, your credit amount will be reduced.
For home purchases after Nov. 6, 2009, when the homebuyer tax credit was expanded and extended, the income limit is $125,000 for single taxpayers and $225,000 for married couples who file a joint return. If you make more than that, your credit amount will be reduced. And if you make more than $145,000 as a single homebuyer or $245,000 and are married, you’ll get no credit.
The income that is considered in determining your credit eligibility and amount is what is known as modified adjusted gross income, or MAGI. This is your adjusted gross income (the amount that is entered on the last line of page 1 of Form 1040 and 1040A) plus some tax breaks that you claimed (in this case, foreign earnings) added back into the mix.
When the homebuyer tax credit was tweaked last November, a purchase price limit was added to the law. Now you can only claim the credit for up to 10 percent of the property’s purchase price as long as the house sold for $800,000 or less. Hence, the $8,000 maximum credit. But if your home costs $800,001, then you’re out of luck. And yes, the pricetag limit applies to first-time and move-up buyers and to all homes, not just those purchased after the credit was extended last November.
No. 5: Calculating ownership time
We bought a home in 2000, and sold it in 2007 to relocate for work. Now we’re relocating again. We lived in the first home for five consecutive years out of the last eight, but have only lived in our current home for a little over two years. To qualify for the move-up credit, do we have to have lived in our current home for five years or just have lived in any residence for five consecutive years?
You should be able to claim the homebuyer tax credit if you meet all the other requirements. The IRS says that eligible taxpayers must show that they owned and lived in a home, not necessarily your current home, as a primary residence for a five-consecutive-year period that falls somewhere within the eight-year time frame that ends on the date the home on which the credit is claimed is purchased.
In your case, let’s say you buy another home March 31, 2010. The eight-year period before that purchase is from April 1, 2002, through March 31, 2010. During that time, you owned and used the same home as your principal residence for five consecutive years, from April 1, 2002, through March 31, 2007.
Note that the year periods considered by the IRS are not the calendar year, but the actual year of residing in a home and purchasing another.
A couple of other things to note here:
- You don’t have to own a home at the time you make your new property purchase.
- Neither do you have to sell if you do own a home and are living in it. In this case, however, you will have to move to the new house so that it becomes your main home to qualify for the homebuyer tax credit.
Essentially, you only have to meet the criteria of having owned and lived in a home as your primary residence for five straight years within the eight years before you buy the house you’ll claim toward the credit.
Because you say “we,” let me note that for married taxpayers, the law looks at the homeownership history of the homebuyer and spouse. Husband and wife must qualify as longtime residents, with each living in the same home for at least five years of the eight pre-new-house-purchase years.
One other tax thing: When you do move to your new home, if this latest relocation is job-related, don’t forget to also claim your moving expenses.
And a final note to all taxpayers who claim the first-time or move-up homebuyer tax credit. You won’t be able to e-file your return. Because of new requirements to ensure credit claims are legitimate, you must send paper copies of home-purchase documents with your Form 1040 to show you do indeed qualify.