A guide to understanding the 2009-2010
homebuyers tax credit
Bringing the Dream of Homeownership Within Reach
The National Association of Realtors beat their drums loudly enough on the steps of Capital Hill to get Congress to approve an extension of the First Time Homebuyer Tax Credit.
But don't jump out of your seats just yet real estate community! The tax credit extension is only for those who were already under contract before the previous deadline of April 30th, they now have until September 30th to close and receive the $8000 first time buyer credit. This extension is from a close date of June 30th.
The most compelling reason for this extension was do to the high volume of Short Sales that are currently under contract and are not on scheduled to close by the June 30th date. This is because Short Sales require bank approval on the Seller's side, and most large banks that are being asked to approve Short Sales are simply over inundated with such requests that they are just backed up.
Details of the Tax Credit
As part of its plan to stimulate the U.S. housing market and address the economic challenges facing our nation, Congress has passed new legislation that:
- Extends the First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers until April 30, 2010.
- Expands the credit to grant up to $6,500 credit to current home owners purchasing a new or existing home between November 7, 2009 and April 30, 2010.
Here is more information about how the Extended Home Buyer Tax Credit can help prospective home buyers become part of the American dream. If you have specific questions or need additional information, please contact a tax professional or the Internal Revenue Service at 800-829-1040.
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Who Qualifies for the Extended Credit?
- First-time home buyers who purchase homes between November 7, 2009 and April 30, 2010.
- Current home owners purchasing a home between November 7, 2009 and April 30, 2010, who have used the home being sold or vacated as a principal residence for five consecutive years within the last eight.
To qualify as a “first-time home buyer” the purchaser or his/her spouse may not have owned a residence during the three years prior to the purchase.
If you or your client purchased a home between January 1, 2009 and November 6, 2009, please see: 2009 First-Time Home Buyer Tax Credit.
Which Properties Are Eligible?
The Extended Home Buyer Tax Credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops.
How Much Is Available?
The maximum allowable credit for first-time home buyers is $8,000.
The maximum allowable credit for current homeowners is $6,500.
How is a Buyer's Credit Amount Determined?
Each home buyer’s tax credit is determined by tow additional factors:
- The price of the home.
- The buyer's income.
Price
Under the Extended Home Buyer Tax Credit, credit may only be awarded on homes purchased for $800,000 or less.
Buyer Income
Under the Extended Home Buyer Tax Credit, which is effective on November 7, 2009, single buyers with incomes up to $125,000 and married couples with incomes up to $225,000—may receive the maximum tax credit.
These income limits have changed from the 2009 First-Time Home Buyer Tax Credit limits. If you or your client purchased a home between January 1, 2009 and November 6, 2009, please see 2009 First-Time Home Buyer Tax Credit.
If the Buyer(s)’ Income Exceeds These Limits, Can He/She Still Get a Credit?
Yes, some buyers may still be eligible for the credit.
The credit decreases for buyers who earn between $125,000 and $145,000 for single buyers and between $225,000 and $245,000 for home buyers filing jointly. The amount of the tax credit decreases as his/her income approaches the maximum limit. Home buyers earning more than the maximum qualifying income—over $145,000 for singles and over $245,000 for couples are not eligible for the credit.
Can a Buyer Still Qualify If He/She Closes After April 30, 2010?
Under the Extended Home Buyer Tax Credit, as long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close.
Will the Tax Credit Need to Be Repaid?
No. The buyer does not need to repay the tax credit, if he/she occupies the home for three years or more. However, if the property is sold during this three-year period, the full amount credit will be recouped on the sale.
The homeownership tax credit that the federal government enhanced earlier this year should be the perfect
motivation to jump off the fence and get into the home buying market. When you combine the tax credit with
today’s continuing low interest rates, large selection of for-sale inventory, and low home prices, many of the pieces
are in place that make this an ideal time to make your housing dream a reality! In short...a non-repayable $6,500-$8,000 tax credit is available to any homebuyer purchasing has been extended to Real Estate Contracts written by April 1, 2010 and Closed by June 1, 2010.
The following information provides you with answers to some frequently asked questions about the tax credit.
Tax Credits - The Basics
What’s this new homebuyer tax incentive for 2010?
The 2008 $7,500, repayable credit has been increased to $8,000 and the repayment feature is eliminated for 2009 purchases. Any home that is purchased for $80,000 or more qualifies for the full $8,000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus,
if you purchase a home for $75,000, the credit would be $7,500. It is available for the purchase of a principal residence on or after Jan. 1, 2009
and before April. 1, 2010, the property must close by June 1, 2010.
Who is eligible?
First-time homebuyers are eligible for the $8,000 tax credit & NEW, anyone buying a new primary residence is eligable for $6,500 credit if they owned their current home for a least five consecutive years in the previous eight years. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the purchase.
How does the tax credit work?
Every dollar of the tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9,500, an $8,000 credit would wipe out all but $1,500 of tax due. So what happens if the purchaser is eligible for an $8,000 credit but their entire income tax liability for the year is only $6,000? The tax credit is what’s called “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6,000, the IRS would send the purchaser a check for $2,000. The refundable amount is the differencebetween $8,000 credit amount and the amount of tax liability. Most taxpayers determine their tax liability by referring to the tables that the IRS prepares each year.
Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $125,000. Married couples who file a Joint return may have income of no more than $225,000.
What’s the definition of “principal residence?”
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as 50%). It is also defined as owner-occupied housing. The term includes single-family detached housings, condos or co-ops, townhouse or any similar type of new or existing dwelling. Even some houseboats or manufactured homes will count.
Do I have to repay the 2009 tax credit?
NO! There is no repayment for 2009 tax credits.
Some Practical Questions
How do I apply for the credit?
There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov
So I can’t use the credit amount as part of my downpayment? UPDATED Check with your lender in some programs yes!
No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the process.
So there’s no way to get any cash flow benefits before I file my tax return?
Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments.
The Value of Your Investment