First-time homebuyer tax credit FAQs

Here's a great list of common questions and answers on the first-time homebuyer tax credit, as listed on the National Association of Realtors’ Web site (and found on Gazettemailhomes.com):

1. What’s this new homebuyer tax incentive for 2009?

The 2008 $7,500, repayable credit is increased to $8,000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8,000 amount. If the house costs less than $80,000, the credit will be 10 percent of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7,500. It is available for the purchase of a principal residence on or after Jan. 1, 2009 and before Dec. 1, 2009.

2. Who is eligible?

Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

3. How does a tax credit work?

Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9,500, an $8,000 credit would wipe out all but $1,500 of the tax due. ($9,500 - $8,000 = $1,500)

4. So what happens if the purchaser is eligible for an $8,000 credit but their entire income tax liability for the year is only $6,000?

This tax credit is what’s called “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6,000, the IRS would send the purchaser a check for $2,000. The refundable amount is the difference between $8,000 credit amount and the amount of tax liability. ($8,000 - $6,000 = $2,000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

5. How does withholding affect my tax credit and my refund?

A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.

6. Is there an income restriction?

Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

7. How is my “income” determined?

For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

8. What if I worked abroad for part of the year?

Some individuals have earned income and/or receive housing allowances while working outside the United States. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?

Not always. The credit phases-out between $75,000-$95,000 for singles and $150,000-$170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return). For example, if a married couple had income of $165,000, their credit would be reduced by 75 percent as shown: Couple’s income: $165,000

Income limit: $150,000

Excess income: $15,000

The excess income amount ($15,000 in this example) is used to form a fraction.

The numerator of the fraction is the excess income amount ($15,000).

The denominator is $20,000 (specified by the statute).

In this example, the disallowed portion of the credit is 75 percent of $8,000, or $6,000 ($15,000/$20,000 = 75 percent x $8,000 = $6,000). Stated another way, only 25 percent of the credit amount would be allowed. In this example, the allowable credit would be $2,000 (25 percent x $8,000 = $2,000)

10. What’s the definition of “principal residence?”

Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50 percent). It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.

11. Are there restrictions on the location of the property?

Yes. The home must be located in the United States. Property located outside the United States is not eligible for the credit.

12. Are there restrictions related to the financing for the mortgage on the property?

In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7,500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

13. Do I have to repay the 2009 tax credit?

NO. There is no repayment for 2009 tax credits.

14. Do 2008 purchasers still have to repay their tax credit?

YES. The $7,500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

Some Practical Questions

15. How do I apply for the credit?

There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

16. So I can’t use the credit amount as part of my down payment?

No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

17. So there’s no way to get any cash flow benefits before I file my tax return?

Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments.

Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer.

In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

Some “Real World” Examples

18. What if I purchase later this year but can’t get to settlement before Dec. 1?

The credit is available for purchases before Dec. 1, 2009. A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before Dec. 1, 2009 for purchases to be eligible for the credit.

19. I haven’t even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?

You’ll have a helpful choice that might speed up the process. Eligible homebuyers who make their purchase between Jan. 1, 2009 and Dec. 1, 2009 can treat the purchase as if it had occurred on Dec. 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options.

* If they purchase between Jan. 1, 2009 and April 15, 2009, they can claim the $8,000 credit on the 2008 return due on April 15.

* They can extend their 2008 income-tax filing until as late as Oct. 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.)

* If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)
Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.

20. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7,500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7,500 credit?

No, you would qualify for the $8,000 credit. Eligible purchasers who have already claimed the $7,500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.

First time buyers...and beyond

I started with a plan:
1) Become a Real Estate agent.
2) Become the voice for helping first time buyers find their first homes.

As I learn more about RE though, I'm growing more interested in finding ways to help RE agents gain exposure on the web using tools like google site registration, Twitter...and helping consumers--all consumers--find what they are looking for (for free)...like foreclosures, REO's, info on short sales, for sale by owner properties.

My revised website goal (plan B):
1) Help buyers find homes and understand policies.
2) Educate RE agents on how to market online and expand their database beyond the MLS.
3) Offer various services, including RE advice, RE sales, ad placement, etc.

My dedication to helping first time buyers has not changed, but my scope has broadened. I intend to include more broad-based content that does not alienate veteran home owners. I've always liked the idea of a one stop shop for information, so I'll continually build my site to make it content rich and more valuable to agents and buyers.

Preparing to buy a house?

Your personal guide to buying a first home

Remember, this year, the rules have changed. Here's why:

• An $8,000 dollar tax credit goes to first time home buyers


• Interest rates are very low, which means a lower mortgage for you!


• Housing prices are low, which means lower mortgage too! (don't wait forever though...the market is on the verge of a rebound, which means the housing prices are going to start going up again

Some things haven't changed:

1. You probably won't benefit from buying if you plan on moving soon.

With all of the costs associated with buying a home, you could end up losing money on the short term. It may take a couple years or longer to recover closing costs, moving costs, etc.

Study the market in your area to determine if housing prices are on the rise or on the fall. You don't want to invest in property where prices are still falling (unless you are willing to wait a while).

2. Pay off your credit debts and clear up delinquencies

Your credit score affects your mortgage rate. Work on getting your credit score up and mortgage rate down by clearing up bad debt. Start by improving your debt to income ratio. Evaluate how much available credit you have versus used credit.

3. Be conservative with how much you can afford.

A large part of the blame in the housing industry falls in the hands of the consumer. Be conservative/realistic. Make sure you'll be able to make payments easily and on time. Don't overstretch your boundaries. When you own a house, you make your own repairs, so be prepared to shell out some cash unexpectedly for broken water lines. Alternatively, if you're a handyman or woman, be prepared to save.

4. Ask the pros

If you're reading this blog, you're probably a do it yourself kind of person. When buying a house, nonsense. Ask the pros, or experienced (and trusted) real estate agents, that have been studying the market for years. They can help you find flaws that you may not notice, hidden costs, and bargaining tactics.

5. Before you start, get pre-approved.

Talk with a bank and get pre-approved. This will allow you to bid with confidence, and move quickly once you find a home.

6. Comparison shopping is a must.

Look at other houses with the same layout, allocation of rooms and sq footage. Compare. Look at houses in the same neighborhood. Compare that too.

7. Hire a professional home inspector.

Appraisal values are a bunch of malarkey. Bank appraisals are inflated, bank home inspections are a joke, and if you want to know what's wrong with your house before you buy it, go out and get a professional home inspector on your own. If you think they might be biased, go elsewhere.

Some new things to consider
1) Don't wait too long to look/buy

It takes a few days to close on a house (like 30 or more on average). If you're hoping to get an $8,000 tax credit in 2010, don't wait until the end of the year to look for a house.

2) Pay less taxes
You can't use the $8,000 tax credit as a down payment, even though it would immensely help first time buyers. The $8,000 tax credit is only good for next tax season...but there is something you can do to increase your income now! Pay less taxes. If you're going to get an $8,000 tax credit in 2010, why not set yourself up to take a bigger hit come tax season and benefit now? Consider what you need and adjust your withholdings accordingly.

Latest on tax credit

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February 17, 2009 10:21am
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Benefits of First Time Home Buyer Tax Credit for West Virginians.

1. Effective for homes purchased January 1, through December 1, 2009.
2. Maximum credit amount is 10% of the purchase price of the home up to $8,000.
3. All principal residences including single family, town homes, condos and co-ops.
4. If the price of the home you buy is $80,000 or more, you will receive the full $8,000 Tax Credit to offset your income tax liability OR receive a REFUND for any amount up to $8,000 if your actual tax liability is less.
5. Income limits to qualify for the tax credit and or Tax REFUND is $75,000 for single filers and $150,000 for married filers. Married filers filing separately can receive a tax credit of $4,000 each.
6. First Time Home Buyer means a person who has not owned a principal resident for the past 3 years.
7. Eligible for home buyers using revenue bond programs for down payment or closing cost assistance.
8. No repayment required unless the home is sold in the first 3 years.

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February 14, 2009 1:39pm
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The stimulus bill has passed through the Senate late last night with the $8,000 housing tax credit for 1st time home buyers intact. Check out the link below for a detailed list of overall spending. Also, follow me on twitter for additional updates.

Complete List of Spending

The president will sign the stimulus plan into law Monday.

What's this mean for First Time Home Buyers?

The final provisions of the bill include:

1) Tax Credit
2) Restoration of 2008 Mortgage Limits

Tax Credit

The 2008 tax credit provision has been amended as follows:
1) Tax credit is increased to $8,000
2) The income limits remain the same: ($75,000 for an individual; $150,000 for a couple).
3) First-time homebuyers and principal residences only.
4) Tax credit is available until December 1st (previously it expired on July 1st).
5) Waiver of recapture (i.e. no repayment requirement) for properties purchased in 2009 prior to December 1st

• The provision is retroactive to purchases made on or after January 1, 2009.


• Recapture section does apply to properties sold in first three years.

6) Waiver of prohibition on financing by mortgage revenue bonds is included
Recovery_Bill_Div_B.pdf


FHA & GSE Mortgage Limits

Recovery_Bill_Div_A.pdf

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February 13, 2009 10:59pm
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First-time home buyers would receive an $8,000 tax credit, and they wouldn't have to repay the government later as is required for the current $7,500 credit. An earlier Senate proposal would have provided all home buyers with a $15,000 credit.

"The home buyer tax credit is a plus for the housing market, but only a small plus," says Mark Zandi of Moody's Economy.com. "The credit … covers only a part of the down payment needed to make a purchase. The housing market will take any help it can get, but it needs more."--USA Today article

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February 13, 2009 9:47am
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Housing tax credit as it stands:

1) Applies to first time homebuyers
2) Tax credit = $8,000
3) Must purchase a home between 1/1/2009 and 12/31/2009
4) Tax credit does not have to be paid back

Excerpt from politico.com on the housing market:


The housing market will have to wait for another day for its government help. Home builders and Realtors pushed for a $35 billion tax credit to support home sales. The heart of the package was a $15,000 tax credit to buy a new home, included in the Senate bill.

But it was eliminated from the stimulus in the House-Senate compromise. Instead, an existing $7,500 tax credit for first-time homebuyers was expanded to $8,000 and extended to the end of 2009. --Politico.com

See Politico's article, Winners & losers in stimulus fight, to see who came out on top and who didn't in the $790B stimulus compromise bill.
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February 12, 2009 11:21 am
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$8,000 tax credit for 1st time buyers (until August)

A $15,000 tax credit for anybody buying a home over the next year was dropped; instead, first-time homebuyers could claim an $8,000 credit for homes bought by the end of August. Car buyers could deduct the sales tax they paid on a new car but not the interest on their car loans. -- Associated Press

See the Associated Press for updates

$15,000 tax credit revisited

Congress chops tax credit from stimulus plan

The $15,000 tax credit proposed by the Senate has been voted down.

The tax credits were designed to boost home sales in a struggling housing market.
According to Joe Lieberman, it appears likely that a $7,500 tax credit will remain in effect.

The current tax credit provision carries income restrictions, phasing out at $75,000 for individuals and $150,000 for married couples. Eliminating repayment provisions would cost the government between $2 and $3 billion, while the larger $15,000 credit would cost an additional $35.5 billion.

If you want the 15K tax credit to pass (or fail) with the bill, you should let your representatives know by sending them an email.

Click Here to voice your opinion. I sent an email to Capito, Byrd, and Rockefeller in just a couple minutes thanks to the easy-to-use submit form.

Proposed $15,000 tax credit wiped out?

As it stands, the $15,000 tax credit for home buyers may be no more. According to the AP, "Working to accommodate the new, lower overall limit of the bill, negotiators effectively wiped out a Senate-passed provision for a new $15,000 tax credit to defray the cost of buying a home, these officials said. The agreement would allow taxpayers to deduct the sales tax paid on new car purchases, but not the interest on loans for the same vehicles."

It is still unclear as to what tax credit will remain, or if an increase over the existing $7,500 tax credit might be possible.

Stay tuned for updates!

Frequently Asked Questions: $15,000 home buyer tax credit

Key points about the proposed tax credit:

1) never has to be paid back (unlike the prev. $7,500 credit)
2) limited to primary residences
3) does not come with an income restriction
4) must live at property at least two years
5) applies to condos, houses, foreclosures, new, previously owned
6) credit could be applied to the 2008 tax year?

Here's some good information about the about the Senate version of the economic stimulus package offered by Luke Mullins at the U.S. News & World Report Home Front blog:

Q: I recently bought a home and qualified for the $7,500 new home buyer tax credit. Should this provision become law, would I qualify for it [as] well?

A: The short answer is no, says Rob Dietz, an economist for the National Association of Home Builders. "The effective date of the ... amendment is the date of enactment," Dietz says. "So if you've already completed a purchase, you would not be qualified for the new program."

Q: Isakson's press release reads: "The amendment would sunset the current $7,500 housing tax credit on the date of enactment." What does the term "sunset" mean there?

A: In this context, the term "sunset" means that the $7,500 new home buyer tax credit would be supplanted by the proposed $15,000 credit, which applies to all home purchases -- not just new homes. "If you are operating under the $7,500 [credit], that's the one you [have]," says Joan Kirchner, Sen. Isakson's Deputy Chief of Staff. "Then, from the date of enactment forward, the new one takes over and nobody else gets the old $7,500 [credit]."

Q: What are the odds of this provision becoming law?

A: The $15,000 home-buying provision is a component of the massive -- and increasingly controversial -- economic stimulus package. The House of Representatives has already passed its version of the stimulus bill, and the White House is putting pressure on the Senate to do the same. However, the size of the package -- which now totals more than $900 billion -- has prompted some Republican senators to try and slash provisions to lower the tab. Still, Kirchner argues that the $15,000 tax credit enjoys strong support from the National Association of Realtors and the National Association of Home Builders and will remain in the stimulus bill that is signed into law. "Because of the way that it was adopted -- unanimously, they didn't call a roll call vote because both sides agreed to accept it -- this provision is in," Kirchner says. Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, also predicted that the amendment would make it into the final package. "It’s a targeted solution that will address housing as well as taxpayers -- both of which need help," he said.

Q: Does this tax credit need to be paid back?

A: Nope. That's a key distinction from the $7,500 first-time home buyer credit, which was "actually a 17-year repayment, which translates into a no-interest loan," Dietz says.

Q: Is there an income limit or any other restrictions on participation?

A: The tax credit would be limited to primary residences and does not come with an income restriction, Kirchner says. "You must occupy [the property] for at least two years as your primary residence," she says. It applies to "any home, meaning a condo, a house, foreclosed, new, [or] previously owned."

Q: Can I take the credit during tax year 2008?

A: Yes, says Chris Cook, a legislative assistant to Sen. Isakson. Even if you buy a home in 2009, the provision would enable you "to file your taxes as if you purchased your home on Dec. 31 of 2008," he says.

Be sure to check me out on twitter.com to Get notifications about the economic stimulus package as it relates to real estate.