The $8,000 first time home buyer tax credit, passed in February 2009, has been extended through April 30th, 2010 as part of The Worker, Homeownership and Business Assistance Act. By most accounts, the first time buyer credit has achieved its goal of spurring homes sales ammong those buyers who did not currently own a home. In fact, according to the National Association of REALTORS® Profile of Home Buyers and Sellers, first time home buyers have accounted for 47 percent of all homes sales this year. That number is up from 41 percent last year and represents the highest percentage of overall homes sales since 1981 (44 percent). Additionally, the home buyer tax credit has been expanded to also provide incentive to move-up or repeat bome buyers.
So, what do you need to know about the home buyer tax credits? We'll attempt to sort through the headlines and get to the basics with a little Q&A:
Q: How are the tax credits calculated?
A: Both tax credits are calculated as 10% of the purchase price. The first time buyer credit cannot exceed $8,000 while the repeat buyer credit is capped at $6,500.
Q: What type of purchase is eligible?
A: To qualify for either tax credit, the purchased home must be used as the primary residence of the buyer. Purchases between family members are not eligible. Additionally, repeat buyer purchases need not exceed the purchase price/estimated value of their current residence to qualify for the tax credit.
Q: Who qualifies for the tax credits?
A: Any person who has not owned a home during the 3 years prior to the date of purchase can qualify for the first time home buyer credit. For the purposes of the current homeowner tax credit, repeat buyers are defined as anyone who has owned and resided in the same property for at least 5 consecutive years during the previous 8 years leading up to purchase.
Q: Are there income limitations on the tax credit?
A: Both home buyer tax credits are available, in full, for single taxpayers with modified adjusted gross income (MAGI) of $125,000 or less and $225,000 for married taxpayers filing jointly. Above these levels, the tax credits phase out proportionally over a span of $20,000. For example, a single taxpayer with MAGI of $145,000 or more would not be eligible for the tax credit, but a MAGI of $130,000 would qualify a single taxpayer for a reduced credit.
Q: The income limitation is higher now than the previous version of the first time home buyer credit. Are these new limits retroactive?
A: Unfortunately, the income limitations are not retroactive for first time home buyers. Any home purchase made between January 1, 2009 and November 6, 2009 will retain the original income limitations, which were $75,000 for single taxpayers and $150,000 for joint filers.
Q: My modified adjusted gross income is higher than the limit but within the phaseout range. How can I estimate my tax credit?
A: In this case, you would divide your overage by the phase out range ($20,000), subtract that from 1 and then multiply by the full tax credit amount. Sounds simple enough, right?
Ok, maybe not. So, let's look at an example:
Jack is a first time home buyer with modified adjusted gross income of $130,000, or $5,000 over the income limitation of $125,000 for single taxpayers. Jack would take his $5,000 overage and divide it by the overage limit of $20,000, resulting in 0.25. Next, he would need to subtract his result from 1, giving him 0.75. Finally, Jack would then multiply the max home buyer tax credit ($8,000 due to his status as a first time buyer) by 0.75. Now we can estimate that Jack's tax credit would equal $6,000.
Q: This all sounds great, but how do I claim the tax credit?
A: The tax credits will be claimed as part of your normal federal income tax return. A copy of your HUD-1 settlement statement will need to be provided with your return, along with IRS Form 5405.
Q: I'm ready to take advantage of one of these credits, what's next?
A: Remember that buying a home is a major life decision. Both of these home buyer tax credits are wonderful incentives, but you'll need to determine if your current financial situation is conducive to making a home purchase. It is important that each individal/family evaluate their unique circumstances. Also, consult with your tax advisor to ensure that you qualify for the credit and when completing your tax return should you make a home purchase.
Once you've made those determinations, you should consult a REALTOR® and start searching homes for sale in your area to find the home that's right for you! Good luck!