Article: The Home Buyer Tax Credit

As you probably know, there is a federal tax credit for a first-time home buyer. This credit has already appeared in two versions:

  • For home purchases on or after April 9, 2008, and before January 1, 2009. This credit went up to $7,500.If this is you, you have to repay the credit by 1/15 of the credit amount for each tax year during the 15-year recapture period. The period begins with the second tax year following the tax year of the purchase. So, if you bought the house in 2008, you start repaying the credit in 2010.
  • For home purchases after  2008 and before December 1, 2009. This credit goes up to $8,000. If this is you, the credit does not have to be repaid unless you sell the home or otherwise stop using it as a personal residence within 36 months after the purchase.

You are a first-time homebuyer if you (and your spouse, if married) did not own a home in the three-year period before you bought the home. Technically, you do not have to be a “first-time” buyer, just a “not in the last three years” buyer. You “phase out” of the credit if you are single and your modified adjusted gross income (MAGI) is between $75,000 and $95,000. If you are married, then the phase-out is between $150,000 and $170,000. This credit was to expire November 30, 2009.

The New Law

Congress extended the credit period. It no longer ends on November 30, 2009. The new period ends April 30, 2010 but not really. If you have a contract to purchase in place by on April 30, 2010, you actually have until June 30, 2010 to close.

Congress also eased up on the income phase-out limits. If you are single, then the MAGI limits are $125,000 and $145,000. If you are married, the limits are $$225,000 and $245,000.

There are some new restrictions, such as the credit being disallowed if the house costs more than $800,000. Also no credit is allowed if you are under age 18 when you buy the home (with an exception).  The IRS learned that some “taxpayers” as you g as age four were claiming the credit, so the put the nix on the underage thing. You now also have to attach a copy of the closing statement to your return.

Remember that you were allowed to buy the home in 2009 and claim the credit on your 2008 tax return? This was an effort by Congress to get the money to you quicker. What happens now if you buy a house in 2010? You guessed it: you can claim the credit on your 2009 return.
What if you owe no tax for 2009 or, at least, a lot less than $8,000? You get up to $8,000 back. The credit is “refundable,” which means you get the money even if you paid no tax.

Oh, how about buying a house from a relative? Forget about it, it won’t qualify. What if you buy from your spouse’s relatives?  Hey, they are not your relatives, right? 

You are clever. This used to work but not anymore. Congress closed the loophole.

The New Credit

You don’t have to be a “not in the last three years” buyer any more.  You can presently own a home and still get the credit, as long as you lived in the home for at least five of the last eight years. 

You may have read this credit referred to as the “move up” credit. That is not accurate. You don’t have to trade-up. An empty-nester moving to a less expensive condo qualifies for the credit.

Now, the move-up credit isn’t as much as the new-homebuyer credit: the maximum is $6,500. You still have to live at the new place for three years.  There is no proration here: if you move out after 2 ½ years, for example, you pay back the full credit not just 6/36 or $1,083. There are some exceptions, such as death, but that is rather extreme tax planning.

Copyright (c) 2009 Kruse & Crawford CPA's