First Time Homebuyer Credit at a Glance

Over the past year I have received numerous inquiries into the tax credit offered to First Time Home Buyers. After speaking with friends, colleague’s and clients, I realized there was a definite need to clarify the program, as there seems to be incredible amount of misinformation being circulated. I have tried below to outline the most important aspects for reference.

The Worker, Homownership, 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 program has been extended to current homeowners as well, but that topic will not be covered here).

First-time home buyers purchasing any kind of home are eligible for the tax credit. To qualify for the credit, the purchase must occur on or after 01/01/2009 and on or before 04/30/2010. The purchase date is the date when closing occurs and the title to the property transfers to the home owner. With that being said, the law also allows home sales occurring by June 30, 2010 to qualify, as long as they are due to a binding sales contract in force on or before April 30, 2010.

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 tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout 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. Example: Single individual with income of $132,000 is $7,000 over the 125,000 threshold. Divide the $7,000 by the phaseout range of $20,000 yields (.35). Subtracting (.35) from 1 results in (.65). Multiplying the 8,000(max credit available) by (.65) shows the borrower is eligible for a partial credit of $5,200. This is very general and should only be used as an example. Any tax questions should be directed to a tax professional.

Now listen up! Not everyone gets $8000 tax credit. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

The tax credit is claimed on your federal income tax return. To take the tax credit the homebuyer completes IRS form 5405 to determine their tax credit amount, and then claims this amount on the 1040 income tax form for 2009 returns. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1.

I think the most important thing to note about the credit is that it is refundable. This means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes! (Not like a tax deduction) If nothing is owed, the government cuts a check for the amount of the credit, or in the case some taxes are owed, the difference between tax owed and the credit offset!

I hope this has shed a little light on the credit that is on offer through the Worker, Homeownership, and Business Assistance Act of 2009. Misinformation has hindered this program since its inception, and with time of expiration fast approaching and rash actions seemingly more commonplace, pertinent information is necessary to make informed financial decisions!!! Obviously all tax questions should be asked of a qualified professional before moving forward with any purchase. I am not a tax preparer and this is not tax advice, but rather reference material for a perspective buyer. Any particular questions should be directed to your tax preparer. You got 25 days to get into contract. Happy House Hunting!