Ever since the housing bubble burst and the current recession began in late 2007, the federal government has been seeking ways to reinvigorate the slumping housing market. Beginning in 2008, first time homebuyers became eligible for a $7,500 maximum tax credit to help in the purchase of their home. Unfortunately, this credit had to be repaid over the course of 15 years. In other words, someone could claim a $7500 tax credit on their tax return but then would have to add $500 to their tax liability in each of the next 15 years!
This has changed for the better under the terms of this year’s economic stimulus package. According to the IRS, under the American Recovery and Reinvestment Act of 2009 qualified first-time homebuyers who purchase a home before December 1, 2009, are eligible to receive a tax credit of up to $8,000, and unlike the previous tax credit I talked about above, people can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year, and they do not have to repay the credit, provided the home remains their main home for 36 months after the purchase date. (http://www.irs.gov/newsroom/article/0,,id=204672,00.html)
Let’s dig into the basics of this tax credit a little further with some basic FAQ’s that will help you understand the full scope of how this credit works: (source: http://www.nahb.org/)
Who is eligible to claim the tax credit?
First-time homebuyers purchasing any kind of home-new or resale-are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the homeowner.
What is the definition of a first-time homebuyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.
How does someone claim the tax credit? Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, homebuyers 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 or forms 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 first-time homebuyer 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.
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 $8,000.
Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return.
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. 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 your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse. Please consult with your tax advisor for more information. Also see IRS Form 5405.
What is the $10,000 tax credit that I’ve heard about? Californians can take advantage of a state tax credit passed by the state legislature as part of the budget deal in February. This $10,000 credit applies to homebuyers who purchase a newly built home as their primary residence between March 1, 2009 and March 1, 2010. Unlike the $8,000 federal credit, the California credit is not limited to first-time homebuyers!
If I’ve already filed to receive the $7,500 tax credit on my 2008 tax returns for a home purchased in 2009, can I claim the new $8,000 tax credit instead?
Yes, homebuyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
Is there any way for a homebuyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective homebuyers 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 down payment.
Buyers should adjust their 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 homebuyers 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 homebuyers 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 homebuyers should check with their state housing finance agency to see if such a program is available in their community.
The Secretary of Housing and Urban Development has announced that HUD will allow “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 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 will be allowed to give homebuyers short-term loans of up to $8,000.
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 will also be able to purchase a homebuyer’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.
Click here to read the HUD mortgagee letter.
First-Time Homebuyers Have Several Filing Options
Per IR-2009-27, March 18, 2009 — For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit.
The filing options to consider are:
- File an extension. Taxpayers who haven’t yet filed their 2008 returns but are buying a home soon can request a six-month extension to October 15. This step would be faster than waiting until next year to claim it on the 2009 tax return. Even with an extension, taxpayers could still file electronically, receiving their refund in as few as 10 days with direct deposit.
- File now, amend later. Taxpayers due a sizable refund for their 2008 tax return but who also are considering buying a house in the next few months can file their return now and claim the credit later. Taxpayers would file their 2008 tax forms as usual, then follow up with an amended return later this year to claim the homebuyer credit.
- Amend the 2008 tax return. Taxpayers buying a home in the near future who have already filed their 2008 tax return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on the 2009 return.
- Claim the credit in 2009 rather than 2008. For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return. This could include people who have less income in 2009 than 2008 because of factors such as a job loss or drop in investment income.
You May Qualify for the Tax Credit, But Is Your Credit Strong Enough to Qualify For the Home Loan?
For many people, in terms of the tax system, there has never been a better time to purchase a new home! However, to take advantage of these credits, you’ll need to make sure your credit reports and credit scores are strong enough to qualify for a new home loan. For first-time homebuyers, who want to take advantage of this credit before December 1, 2009, becoming proactive in strengthening your credit reports and credit scores is key.
Here’s a short list of what problematic credit reports and low credit scores can cost when it comes to a mortgage:
You May Never Own A Home AT ALL, AGAIN, Or FOR YEARS. Whether or not you’ve always had poor credit, or have just suffered from the recent mortgage crisis, this is a very real possibility for individuals. If you have low scores or problematic reports, lenders will either deny you flat out or penalize you with such exorbitant rates that the outcome ranges from completely undesirable to impossible.
You Will Pay Higher Interest Rates. It just makes sense that if you have higher credit scores, you will pay a lower interest rate on your mortgage loan and will have to put less down. Fair Isaac’s consumer website at http://www.myfico.com offers a mortgage payment calculator that is updated regularly to show consumers how their FICO score can affect their interest rate. Per myfico.com, if your credit scores are under 620, consumers could pay $4236 more per year than someone with a 720 credit score for a 30-Year Fixed Rate Mortgage with a loan principal amount of $300,000.That’s approximately $127,007 over the life of the loan.
Now You Will Be Subject To Loan Level Price Adjustment Fees (LLPA’s) when applying for a conventional mortgage. Consumers with a middle score of less than 720 will now be charged an LLPA fee which was implemented by Fannie Mae and Freddie Mac in March of 2008. For people experiencing the worst-case scenario, carrying a middle credit score of less than 639 could cost you an extra $9,000 upfront fee on a $300,000 loan amount. Click here to see where your scores fall.
You Will Pay More For Private Mortgage Insurance (PMI). PMI is insurance that mortgage lenders require from most homebuyers who have less than a 20% down payment on their property. If your credit scores are marginal, your private mortgage insurance rate might be hundreds of dollars higher per month than you expect, and you usually don’t find this out until closing.
So What Can You Do? Getting and Maintaining Strong Credit Scores
- My Free Special Report, Save Your Credit – Save Your Life is a great place to start! Click here to learn more.
- My Book, The Big Score – Getting It & Keeping It will give you the knowledge and the tools you need to Recover and Rebuild from any credit crisis. Even if you have great credit now, this book will help insure that it stays that way. Click here to learn more.
- Hire a Professional to help. If your credit challenges are to much to handle on your own, consider hiring Credit Resource Corp. to help you reach your credit score goals. Click here to read about their services now.
As always, I want to stress the importance of being proactive. There is no better time to take control of your credit than right now! If you continue to follow the basics of money management that have been applicable for years, keep track of your credit reports, and continue to do everything you can to bring your score up and keep it as high as possible, then you’ll be in a strong place financially to take advantage of the tax credits available to homebuyers. If you need help, I’m always here to help you set your credit goals and implement a strategy to reach them!