We are pleased that our friend Jeff Brooks at Plain’s Capital prepared these Questions and Answers regarding this program for our clients. Please call us for further assistance. 888 696 0080 or 972 322 7776
Who is eligible to claim the tax credit?
First time homebuyers purchasing any kind of home, new or resale, are eligible for this tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1 2009. For the purposes of the tax credit the purchase date is the date when closing occurs and the title to the property transfers to the homeowner.
What is the definition of a first-time homebuyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a firs-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.
How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.00.
Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for a single taxpayer and $150,00 for married taxpayers filing a joint return. The phase-out range for tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and id reduced proportionally for taxpayers with MAGI’s between these amounts
What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as adjustments or above the line deductions), but before itemized deductions from Schedule A or personal exemptions are subtracted.
On Forms 1040 and 1040A, AGI is the last number of page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possible. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers who MAGI exceeds the phase-out limits.
How is this homebuyer tax credit different from the tax credit that Congress enacted in July 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous “credit” was essentially an interest-free loan. The tax incentive is a true tax credit. However, homebuyers must us the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, homebuyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on the line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications or forms are required, and no pre-approval is necessary.
However, you will want to be sure that you qualify for the credit under the income limits and first-time homebuyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.
First time home buyer interior
What types of homes will qualify for the tax credit?
Andy home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000/$500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information. Also see IRS Form 5405
I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even the entire amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer world owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 homebuyer tax credit, as a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1000 owed).
I purchased a home in early 2009 and have already filed to receive the $7,500 tax
credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Homebuyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in Publication 519
Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for=dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15% of $8,000). Or lowered from $8,000 to $6,800.
If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit
against my 2008 tax return?
Yes. The law allows taxpayers to choose (”elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a homebuyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
The Secretary of Housing and Urban Development has announced that HUD will allow “monetization” of the tax credit. What does that mean?
It mean that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain down payment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders will be allowed to give homebuyers short-term loans of up to $8,000.
These guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing loner term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax credit loans, which homebuyers may use to satisfy the FHA 3.5 percent down payment requirement.
In addition, approved FHA lenders will also be able to purchase a home buyer’s anticipated tax credit to pay closing costs and down payment costs above the 3.5 percent down payment that is required by FHA-insured homes.
