New Home Buyers Credit
The Worker, Homeownership, and Business Assistance Act of 2009 has
extended the tax credit of up to $8,000 for qualified first-time home
buyers purchasing a principal residence. The tax credit now applies to
sales occurring on or after January 1, 2009 and on or before April 30,
2010. However, in cases where a binding sales contract is signed by
April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
For
sales occurring after November 6, 2009, the Act establishes income
limits of $125,000 for single taxpayers and $225,000 for married
couples filing joint returns.
The income limits for sales
occurring on or after January 1, 2009 and on or before November 6,
2009, are $75,000 for single taxpayers and $150,000 for married
taxpayers filing joint returns.
The following questions and
answers provide basic information about the tax credit. If you have
more specific questions, we strongly encourage you to consult a
qualified tax advisor or legal professional about your unique situation.
Existing Home Buyer Credit
Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.
What is the definition of a move-up or repeat home buyer?
The
law defines a tax credit qualified move-up home buyer (“long-time
resident”) as a home owner who has owned and resided in a home for at
least five consecutive years of the eight years prior to the purchase
date. For married taxpayers, the law tests the homeownership history of
both the home buyer and his/her spouse. Repeat home buyers do not have
to purchase a home that is more expensive than their previous home to
qualify for the tax credit.
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 $6,500. Purchases of homes priced above $800,000 are not
eligible for the tax credit.
Are there any income limits for claiming the tax credit?
Yes.
The income limit for single taxpayers is $125,000; the limit is
$225,000 for married taxpayers filing a joint return. The tax credit
amount is reduced for buyers with a modified adjusted gross income
(MAGI) above those limits. The phase out range for the 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 $145,000 (single) or
$245,000 (married) and is reduced proportionally for taxpayers with
MAGIs 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 on page 1 and the 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?
Possibly.
It depends on your income. Partial credits of less than $6,500 are
available for some taxpayers whose MAGI exceeds the phaseout limits.
Can you give me an example of how the partial tax credit is determined?
Just
as an example, assume that a married couple has a modified adjusted
gross income of $235,000. The applicable phaseout to qualify for the
tax credit is $225,000, and the couple is $10,000 over this amount.
Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you
subtract 0.5 from 1.0, the result is 0.5. To determine the amount of
the partial first-time home buyer tax credit that is available to this
couple, multiply $6,500 by 0.5. The result is $3,250.
Here’s
another example: assume that an individual home buyer has a modified
adjusted gross income of $138,000. The buyer’s income exceeds $125,000
by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields
0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying
$6,500 by 0.35 shows that the buyer is eligible for a partial tax
credit of $2,275.
Please remember that these examples are
intended to provide a general idea of how the tax credit might be
applied in different circumstances. You should always consult your tax
advisor for information relating to your specific circumstances.
How
is this home buyer tax credit different from the tax credit that
Congress enacted in July of 2008? How is this different than the rules
established in early 2009?
The previous tax credits applied only to first-time home buyers and were for different amounts of money.
How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405
to determine their tax credit amount, and then claim this amount on
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
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
repeat home buyer 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. Home buyers must attach a copy of their HUD-1
settlement form (closing statement) to Form 5405 as proof of the
completed home purchase.
What types of homes will qualify for the tax credit?
Any
home that will be used as a principal residence will qualify for the
credit, provided the home is purchased for a price less than or equal
to $800,000. 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, among other
family members, your ancestors (parents, grandparents, etc.), your
lineal descendants (children, grandchildren, etc.) or your spouse or
your spouse’s family members. 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 all of the 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 would owe the IRS $1,000 on April 15th.
Suppose now that the taxpayer qualified for the $6,500 home buyer tax
credit. As a result, the taxpayer would receive a check for $5,500
($6,500 minus the $1,000 owed).
Instead
of buying a new home from a home builder, I hired a contractor to
construct a home on a lot that I already own. Do I still qualify for
the tax credit?
Yes.
For the purposes of the home buyer tax credit, a principal residence
that is constructed by the home owner is treated by the tax code as
having been “purchased” on the date the owner first occupies the house.
In this situation, the date of first occupancy must be after November
6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided
a binding sales contract was in force by April 30, 2010).
In
contrast, for newly-constructed homes bought from a home builder,
eligibility for the tax credit is determined by the settlement date. Be
sure to check with a tax advisor in cases where a HUD-1 form is not
used at settlement to be sure you have sufficient documentation to
attach to IRS Form 5405.
Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program.
I am not a U.S. citizen. Can I claim the tax credit?
Perhaps.
Anyone who is not a nonresident alien (as defined by the IRS) and who
has owned and resided in a principal residence in the United States for
at least five consecutive years of the eight years prior to the
purchase date can claim the tax credit if they meet the income limits.
For married taxpayers, the law tests the homeownership history of both
the home buyer and his/her spouse. The IRS provides a definition of
“nonresident alien” in IRS 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 $6,500 in income taxes and
who receives an $6,500 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 $6,500 in income taxes. If the taxpayer receives a
$6,500 deduction, the taxpayer’s tax liability would be reduced by $975
(15 percent of $6,500), or lowered from $6,500 to $5,525.
Is
there a way for a home buyer to access the money allocable to the
credit sooner than waiting to file their 2009 or 2010 tax return?
Yes.
Prospective home buyers who believe they qualify for the tax credit are
permitted to reduce their income tax withholding. Reducing tax
withholding (up to the amount of the credit) will enable the buyer to
accumulate cash by raising his/her take home pay. This money can then
be applied to the downpayment.
Buyers should adjust the
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.
In addition, rule changes made as part of the
economic stimulus legislation allow home buyers to claim the tax credit
and participate in a program financed by tax-exempt bonds. As a result,
some state housing finance agencies have introduced programs that
provide short-term second mortgage loans that may be used to fund a
down payment. Prospective home buyers should check with their state
housing finance agency to see if such a program is available in their
community. To date, 18 state agencies have announced tax credit
assistance programs, and more are expected to follow suit.
HUD allows “monetization” of the tax credit. What does that mean?
It
means 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 or 2010 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 are allowed to give home buyers
short-term loans. The guidelines also allow government agencies, such
as state housing finance agencies, to facilitate home sales by
providing longer term loans secured by second mortgages.
Housing
finance agencies and other government entities may also issue tax
credit loans, which home buyers may use to satisfy the FHA 3.5 percent
down payment requirement.
In addition, approved FHA lenders can
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
for FHA-insured homes.
If
I’m qualified for the tax credit and buy a home in 2009 (or 2010), can
I apply the tax credit against my 2008 (or 2009) tax return?
Yes.
The law allows taxpayers to choose (“elect”) to treat qualified home
purchases in 2009 (or 2010) as if the purchase occurred on December 31,
2008 (or if in 2010, December 31, 2009). This means that the previous
year’s income limit (MAGI) applies and the election accelerates when
the credit can be claimed. A benefit of this election is that a home
buyer in 2009 or 2010 will know their prior year 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 prior year tax return, but who have already submitted their
tax return to the IRS, may file an amended return claiming the tax
credit using Form 1040X. You should consult with a tax professional to
determine how to arrange this.
For
a home purchase in 2009 or 2010, can I choose whether to treat the
purchase as occurring in the prior or present year, depending on in
which year my credit amount is the largest?
Yes.
If the applicable income phase out would reduce your home buyer tax
credit amount in the present year and a larger credit would be
available using the prior year MAGI amounts, then you can choose the
year that yields the largest credit amount.
