Buying your first home is enough of a challenge in good times. In today’s economy, it’s almost impossible for some people. But Uncle Sam wants to help.
Bankrate's 2010 Tax Guide
The first-time homebuyer tax credit appeared a couple of years ago. In 2009, lawmakers improved upon the original tax break.
Now the homebuyer tax credit is a true credit. That means it reduces your tax bill dollar-for-dollar and in this case, could get you a refund if your IRS bill is zero.
The credit amount was increased to $8,000.
It’s not limited to strictly first-time buyers. Homeowners who’ve lived in their residences for a while and want to buy another one can get a $6,500 credit.
And the tax break was extended into 2010. While all of these changes make home buying a better option for many, they also have created a lot of confusion.
Improved 2009 credit
The original tax break for first-time buyers wasn’t really a credit. It was an interest-free loan of $7,500 that buyers claimed on their returns and then paid back over 15 years, also when they filed their taxes.
That changed when the American Recovery and Reinvestment Act of 2009 became law on Feb. 17, 2009. That bill upped the homebuyer tax credit to a maximum of $8,000 or 10 percent of your home’s purchase price, whichever is less.
- Improved 2009 credit.
- More time for first-time buyers.
- Definition of ‘first-time.’
- A new buyer definition, credit amount.
- Income limit changes.
- Credit e-filing on hold.
It also made the credit a real credit. No payback is required for qualified homebuyers. In most instances, the $8,000 does not have to be repaid.
The change, however, came with an expiration date. Qualifying home purchases had to be made by Nov. 30, 2009.
More time for first-time buyers
As the November deadline approached, Congress got busy. Just weeks before the homebuyer tax credit expired, it was extended.
More notable, the tax benefits of buying a home were expanded to include more taxpayers.
Under the Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, you have until this April 30 to buy or sign a contract to buy a principal residence. You then get two more months, until June 30, to close on the property.
If you’re a first-time buyer, you also get the option of claiming the credit on either your 2009 tax return or waiting until you file your 2010 taxes next year.
Claiming the homebuyer tax credit on a 2009 return is a no-brainer for folks who just bought or plan to close on their first home by the April 15 tax-filing deadline and who are short on cash. But run the numbers for both the 2009 and 2010 tax years to make sure which tax year claim will give you the best break.
Remember, too, that if you expect your purchase to be completed by the June deadline, you can file a tax extension request and then claim the credit on your 2009 return when you file it by Oct. 15.
Conversely, if you decide to use the credit claim on your 2010 taxes but then discover it would be better for you to take the $8,000 for the 2009 tax year, you can file an amended return to make the claim.
Definition of ‘first-time’
OK, you bought a home within the qualifying dates. You’ve decided you want to claim the homebuyer tax credit on your 2009 return. Now you must make sure you qualify.
Although the tax break is called the First-time Homebuyer Credit, the tax definition of first-time buyer isn’t as straightforward as you might think.
According to the IRS, a first-time buyer is a person who has not owned a primary residence within the past three years. If you and another person buy the house together, each of you must be eligible.
The same rule applies to married couples, meaning each spouse must meet the three-year no-homeownership rule separately. “You cannot get around it by a husband owning a house before marriage and then putting your new home in just the wife’s name,” says Bob D. Scharin, senior tax analyst from the Tax & Accounting business of Thomson Reuters. “The ownership rule still applies so they’re ineligible.”
However, owning a vacation home a few years before your new residential purchase is not a problem. The law only stipulates that owning a primary residence in that period disqualifies you for the credit.
A new buyer definition, credit amount
The November 2009 law also included a new homeowner definition, that of a “longtime resident.”
These buyers, sometimes also referred to as “move-up” home purchasers, are eligible for a homebuyer tax credit of up to $6,500.
To qualify as a longtime home resident, you must have owned and lived in the same house as your primary residence for at least five consecutive years of the eight-year period before you bought another house. Your newly purchased home also must then become your new principal residence.
Income limit changes
In addition to extending and expanding the credit, the November law also increased the income thresholds so that more buyers might qualify for the homebuyer tax credit.
But that also means you need to be precise as to when you bought your new home.
For homes purchased between Jan. 1, 2009, and Nov. 6, 2009, the full first-time homebuyer tax credit is available to taxpayers with modified adjusted gross income up to $75,000, or $150,000 for joint filers. Those with incomes between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, will get a smaller credit. If your income for your filing status exceeds the top amounts, you aren’t eligible for the credit.
Buyers of homes between Nov. 7, 2009, and June 30, 2010, will qualify for the full homebuyer tax credit if their modified adjusted gross incomes is $125,000 or less, or $225,000 or less for joint filers. Those with income between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Higher income earners do not qualify for any credit.
In addition, the credit now has additional qualifications for homes bought on Nov. 7 or later.
- Dependents are not eligible to claim the homebuyer tax credit.
- No credit is available if the purchase price of a home is more than $800,000.
- A purchaser must be at least 18 years of age on the date of purchase.
And regardless of when you bought (or buy) your home, flipping the property will cost you.
Although the $8,000 credit doesn’t have to be repaid as did the original tax break, you could be forced to pay back the money if you don’t live in your first home long enough.
If you claim the homebuyer tax credit and don’t live in the house you purchased as your main home for at least three years, you will have to pay back the credit amount when you file your tax return for the year that you moved out of the property.
Credit e-filing on hold
Filers who use tax preparation software can get an idea of how much claiming the homebuyer tax credit this filing season will help. But these new homeowners won’t be able to electronically file their first-home credit claims for a while.
Form 5405, which taxpayers must use to take the first-time home purchase tax break, has been revised to reflect the new purchase dates and $8,000 credit amount.
However, the form has not been formatted and approved by the IRS for e-filing. Don’t delay your 2009 return filing waiting for the electronic form. That’s not going this filing season.
You can still use the software to complete your taxes and make the credit claim, but you’ll have to print out your return paperwork and snail mail the material to the IRS.