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First-Time Home Buyer Tax Credit

  • If you still don’t know whether to buy your first home or not, there is good news for you, if you buy a property until the end of April, you will take the advantage of the federal government’s tax credit of up to $8000. Also there are other reasons why you should end up the home buying process this spring.

    Spring is considered to be the best time to buy a property. A large existing home inventory and low interest rates make this time of the year the perfect one to buy a home you want. But don’t be indecisive. When you the home that suits your needs, make an offer.

    First of all, you should find a real estate agent who specializes in the area where you want to buy. You should be preapproved by a lender and make sure that all your documents are in order. As a first time buyer you should also know about the $8,000 home buyer tax credit signed into law by President Obama on February 17, 2009, as part of the American Recovery and Reinvestment Act of 2009. If you are a first-timer who have not owned a home in the past three years and you want to purchase a home, you can get the tax credit for 10 percent of the purchase price, with a maximum credit amount of $8,000. This means if you buy a home for $8,000 or more, you can deduct the full $8,000 tax credit. Remember, only homes purchased on or after January 1, 2009 and before June 30, 2010 qualify for tax credit. Also your income level as a single person should not exceed $125,000 and for married couples the income level is $225,000 or less. The tax credit program is unavailable to persons under age 18 and for persons claimed as dependents by other taxpayers.

    Remember, only first-time homebuyers are eligible. The law defines first-time homebuyer as one not owning a home over the past three years. If you purchased a home with your spouse and file as married filing separately, each of you can take a maximum of half the available tax credit as long as you both qualify to be first-time homebuyers. If you purchased a home with one or more people who is not your spouse, only one of you has to be a first-time homebuyer.

    The available tax credit is worth 10% of the purchase price of the home, up to a maximum of $8,000 for first-timers and $6,500 of existing owners.

    Limited to individuals with adjusted gross incomes of $75,000 as a single person and $150,000 filling jointly. The new income limits are applicable to purchases occurring November 7th, 2009 or after. The credit is reduced or eliminated for higher-income taxpayers. The credit is based on MAGI (modified adjusted gross income). MAGI is your total annual income minus adjustments to income. If your modified gross income is above the limit you also can get the tax credit, but it will be less than $8,000. For example, a married couple with a modified adjusted gross income of $235,000 can get the partial tax credit as first-time homebuyers of $4,000. To get a better idea about the amount of tax credit relating to your circumstances, you should consult your tax advisor.

    Previously there was also the tax credit but it was enacted by Congress in early 2009. The new one differs a bit from the previous one: income limits are increased, the deadlines of the program are extended, thedocumentation requirements are tightened.

    Most qualifying taxpayers should complete Form 5405, First-Time Homebuyer Credit and Repayment of the Cred, which determines your tax credit amount. You won’t need pre-approval or other applications. Nevertheless, you should be sure to qualify for the credit under the limits of your income. Also your home purchase process should be completed. You must attach documentation showing the purchase of a home between the applicable dates.

    Regardless of the type of home you want to buy, it must be purchased as your primary residence. Otherwise your home won’t qualify for the tax credit. It can be single-family detached home, attached home, condo or houseboat. It is important to point out that you cannot purchase a home from your family members or your spouse’s family members. A home should be purchased for a price less than or equal to $800,000. For more information, you should consult your tax advisor.

    Also it is necessary to note that the tax credit is refundable. It means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically the government sends the taxpayer a check for a portion or the entire amount of the refundable tax credit.

    The tax credit shouldn’t be repaid, if the buyer occupies the property for three years or more. However, if the home is sold during this period of time, the full amount credit will be recoupled on the sale.

    In case, a person hires a contractor to construct a home instead of buying a new home he still can qualify for the tax credit. As a principal residence that is constructed by the home owner is treated as having purchased. However, the date of first occupancy should be on or after November 6, 2009 and on or before April 30, 2010. In contrast, the tax credit is determined by the settlement date for newly-contacted homes bought from a home builder.

    The buyer can also claim for the tax credit if the property is purchased under a mortgage revenue bond (MRB) program. But it is important to note that first-time home buyers who purchased a home in 2008 under an MRB program may not claim the tax credit.

    If the buyer is not a U.S. citizen, he still can claim the tax credit. A nonresident alien who meets the income limits test and who has not owned a principal residence in the previous three years can claim the tax credit. However, it is necessary to specify who is considered to be a “nonresident alien” in IRS Publication 519.

    A tax credit differs from a tax deduction. A tax deduction is subtracted from the amount of income that is taxed. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes.

    For homes purchased in 2008, there is no an option for qualifying for this credit. But if your home was purchased between April 9, 2008 and November 6, 2009, you may qualify for a different tax credit. You should consult your tax advisor for more information.

    As a homebuyer you can get an access to the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return. First, if the prospective home buyer believes that he can qualify for the tax credit, he is permitted to reduce his income tax withholding. Reducing tax withholding will enable the buyer to accumulate cash by raising his take home pay. This money can then be applied to the down payment.Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties. Second, home buyers can claim the tax credit and participate in a program financed by tax-exempt bonds. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community.    

    HUD is now allowing “monetization” of the tax credit. It means that rather than waiting until buyers file their 2009 or 2010 income taxes to receive a refund, HUD allows them using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase. These funds can be used for down payment or closing costs expenses.  

    Also for a home purchase in 2009 or 2010 the buyer can choose whether to treat the purchase as occurring in the prior or present year, depending on in which year the credit amount is the largest.




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