FIRST TIME HOMEBUYER CREDIT
by Barry L Weller, EA
Taxpayers who bought a main home after April 8, 2008 or who are considering buying a home before July 1, 2009 may qualify for the first-time homebuyer credit of up to $7,500. This new tax credit was included in the Housing and Economic Recovery Act of 2008. This credit is different then most other tax credits in that it is essentially a 15 year interest-free loan.
To qualify for the credit, all of the following tests must be met. First, taxpayers must not have owned a main home at anytime during the three years prior to the date of purchase of a main home. In other words, first time homebuyer is defined as not owning a home for 3 years. Second, only a main home purchased in the United States after April 8, 2008 and before July 1, 2009 qualify. Vacation homes and rental property do not qualify. For a home that you construct, the purchase date is the first date you occupy the home. Third, you can not have bought your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild. Fourth, you must not have sold your home before the end of the year or stopped using it as your main home. Fifth, your home financing must not have come from tax-exempt mortgage revenue bonds.
In addition to the above tests, taxpayers with a filing status of married filing joint do not qualify for the credit if their modified adjusted gross income (MAGI) is $170,000 or greater. If their MAGI is between $150,000 and $170,000 the credit is partially phased out. Taxpayers with any other filing status do not qualify for the credit if their MAGI is $95,000 and above. If their MAGI is between $75,000 and $95,000 the credit is partially phased out.
The first time homebuyer credit will reduce a taxpayer’s tax bill or increase his refund dollar for dollar. It is fully refundable, meaning that the credit will be paid out to eligible taxpayers even if they owe no tax or the credit is more than the tax they owe. Eligible taxpayers claim the credit on the new IRS Form 5405. The credit is 10 percent of the purchase price of the home, with a maximum credit of $7,500. The limit is $3,750 for a married person filing a separate return. If you make an eligible home purchase in 2008, you claim the first time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on your 2008 return, an amended 2008 return, or your 2009 return.
Since the credit operates much like an interest-free loan, eligible taxpayers who claim the credit on their 2008 federal income tax return must begin repaying the credit by including one-fifteenth of the credit as an additional tax on his 2010 return. For taxpayers who claim the maximum $7,500 on their 2008 return, their additional tax repayment of the credit on their 2010 return will be $500. Generally, 15 equal annual installments beginning with the second tax year after the year the credit is claimed is the schedule to repay the credit. Four exceptions apply to the 15 equal annual installment payment rule. First, if you die, any remaining annual installments are not due. But if you filed a joint return, your surviving spouse would be required to repay his or her half of the remaining repayment amount. Second, if you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. Third, if you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale. If there is a loss on the sale, the remaining annual installments may be eliminated. Fourth, if you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.
Taxpayers who claim the first time homebuyer credit may need to adjust their withholding or make quarterly estimated tax payments to ensure they are not under-withheld in 2010 through 2024.
Barry L Weller, EA is the president of Barry Weller & Associates with offices at 216 E Philadelphia Ave, Boyertown. Phone (610) 367-8280 He is an enrolled agent, licensed to represent taxpayers before the IRS.