First-Time Homebuyer Tax Credit – Frequently Asked Questions

What is a tax credit?

A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed.

Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual’s primary residence.

What is the tax credit for first-time homebuyers (FTHBs)?

An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is eligible for the FTHB tax credit?

Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible. This applies both to single taxpayers and married couples.

In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

How do I claim the credit?

You may choose to either apply for the credit with your 2009 tax return or you may apply for the credit sooner by filing an amended 2008 tax return with Form 5405 (http://www.irs.gov/pub/irs-pdf/f5405.pdf).

Is there a deadline for purchasing the home?

Yes. You must close on or before November 30, 2009.

Are there income limitations for the credit?

Yes. The credit is reduced or eliminated for higher income tax filers. The credit is phased out based on modified adjusted gross income. For a married couple filing a joint return, the range for a reduced credit is $150,000 to $170,000. For single taxpayers, the range is $75,000 to $95,000. So, the full credit is available for single taxpayers earning $75,000 or less and married taxpayers earning $150,000 or less.

Can you claim the tax credit in advance of purchasing a property?

No. The IRS has recently begun prosecuting people that have claimed credits where a purchase had not taken place.

Can a taxpayer claim a credit if the property is purchased from a seller with seller financing and the seller retains title to the property?

Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Examples of this would include a land contract, contract for deed, etc.

According to the IRS, factors that would demonstrate the ownership of the property would include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property.

Are there other restrictions to taking the credit?

Yes. According to the IRS, if any of the following describe your situation, a credit would not be due.

  • You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
  • You do not use the home as your principal residence.
  • You sell your home before the end of the year.
  • You are a nonresident alien.
  • You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
  • Your home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
  • You owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.

Can you buy a home from a step-relative and be eligible for the credit?

Yes. Provided the person you are buying a home from is not a direct blood relative, the purchase would be allowed.

Can parent(s) who will not live in the property cosign for a mortgage for their child and the child that is a qualifying FTHB still be eligible for the credit?

Yes.

Can a separated spouse who has not owned a home for four years qualify if the spouse has owned a property anytime in the last three years?

No.

The best path to take in any situation regarding income taxes is to speak with a professional tax preparer or CPA. If you have any questions that fall outside the situations here, give me a call and if you do not have an accountant to speak with, I can refer you to one.

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