Homebuyers Credit

1st Time Homebuyer Credit Expanded

New Home Purchases Through April 2010 Qualify for Tax Credit

By Kelly A. Burtchett 
July 2009

Individuals with recent or planned home purchases can benefit from “The First-Time Homebuyers Credit” thanks to provisions in the recent recovery and reinvestment acts.

 Background

The New First-Time Homebuyers Tax Credit was first introduced by the Housing and Economic Recovery Act of 2008. This refundable credit, as part of the Federal government’s overall economic stimulus plan, is intended to create buying incentives in the current economy and encourage, assist and provide some early security to first-time home buyers. Refundable, meaning taxpayers will actually receive cash if the credit exceeds their tax liability.

The 2008 act provisions are applicable to qualified first-time homebuyers who purchased a primary residence between Apr. 9, 2008 and Dec. 31, 2008. The credit is 10% of the purchase price, with a maximum available credit of $7,500 ($3,750 if married filing separately). The credit operates much like an interest-free loan, which must be paid back in equal annual installments over a 15 year period, starting in 2010.

The 2008 act was substantially modified by the passage of the American Recovery and Reinvestment Act of 2009. The Stimulus Act extended the credit and is applicable to qualified home purchases between Jan. 1, 2009 and Nov. 30, 2009. In addition, this act increased the maximum available credit to $8,000 ($4,000 if married filing separately) and more importantly, unlike the credit for 2008, it does not have to be repaid.

Signed into law on Nov. 6, 2009 the homebuyer’s credit has been modified again by the Worker, Homeownership and Business Assistance Act of 2009. The Assistance Act extends the credit deadlines for purchasing and closing on a principle home, authorizes the credit for long-time homeowners buying a replacement principal residence and raises the income limitations for homeowners claiming the credit.

Expansion of Credit

Deadlines. Under the new law, a qualified purchase or a binding contract to purchase must be entered into on or before Apr. 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

Existing Homeowners. For the first time, a credit is available to “long-time residents of the same principal residence.” Current homeowners may qualify for a reduced credit of $6,500 ($3,500 if married filing separately). You must have lived in the same principle residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased. This provision paired with the $500,000 ($250,000 for single taxpayers) sale of principal residence exclusion of gain is a great opportunity which many taxpayers can benefit from. You do not have to sell the existing home before buying the subsequent home. In this case, a taxpayer could retain the existing home as a vacation home or rental property and still claim the credit for the purchase of a new principal residence.

Income Limitations. The expansion is allowing people with higher incomes to now qualify for the credit. The new law raises the income limits for homes purchased after Nov. 6, 2009. The credit phases out for individual taxpayers with modified adjusted gross income between $125,000 and $145,000 or between $225,000 and 245,000 for joint filers. The existing modified adjusted gross income limits phase-outs of $75,000 to $95,000 or $150,000 to $170,000 for joint filers still apply to purchases on or before Nov. 6, 2009.

New Restrictions

Several new restrictions apply to homes purchased after Nov. 6, 2009:

1.      You must attach a properly executed settlement statement to your return;

2.      No credit is available if the purchase price of the home exceeds $800,000;

3.      The purchaser must be at least 18 years old on the date of the purchase;

4.      A dependent is not eligible for the credit.

 New Benefits

There are new benefits for members of the military and certain other federal employees.

1.      Members of the uniformed services, members of the Foreign Services and employees of the intelligence community serving outside the U.S. have an extra year to purchase a principal residence.

2.      In many cases, the recapture requirement is waived.

As you consider when to make the jump into homeownership let’s remember there are only a few months left to take advantage of this Federal support. We have been working with numerous clients regarding credit eligibility and maximization, potential implications, and whether or not their situation is suitable.

Kelly A. Burtchett works as an accountant in DGN’s tax department with additional duties in the audit and BizTek departments. A Traverse City native, Kelly graduated with honors from Ferris State University where she earned a Bachelor of Science in Business degree in Accountancy. She is a member of the Michigan Association of CPAs and serves on the Professional Development board of the Traverse City Young Professionals.