Tax Tips
First Time Homebuyers Get a Real Tax Credit - February 2010
Richard Scrivanich - Partner
In the Housing and Economic Recovery Act of 2008, Congress provided certain home purchasers with a "tax credit" of 10% of the home's price, up to $7,500. Homebuyers who had not owned and occupied a house as a principal residence in the three years before the purchase were eligible.
In reality, this tax break was not a true tax credit. Instead, qualified homebuyers received an interest-free loan from the federal government. That is, they received up to $7,500 upfront in tax savings, an IRS refund check, or both. However, taxpayers receiving that $7,500 were schedule to repay that amount in higher taxes - $500 per year for 15 years. If those taxpayers sold the house within 15 years, repayment would be accelerated.
Raising the cap, forgiving repayment
The Recovery Act modifies the homebuyers tax credit. The cap is now $8,000 on qualified home purchases over $80,000. (For less expensive homes, the tax credit is 10% of the price.) In addition, qualified homebuyers will not have to repay the $8,000 tax credit as long as they stay in the house as owners for at least 36 months. This credit amounts to an $8,000 discount on the home's price, courtesy of the federal government.
Example: Mark and Claire Collins buy their first home for $100,000 and qualify for an $8,000 tax credit. Without this tax credit, they would have owed $1,000 when they filed their federal income tax return. The $8,000 tax credit completely offsets their $1,000 tax obligation, so they'll owe no income tax with their return. In addition, they'll get a $7,000 refund from the IRS for a total tax savings of $8,000.
Sooner or later
Now that two laws have included a tax credit for homebuyers who have not owned and occupied a principal residence in the previous three years, there are two sets of tax benefits:
- For qualified home purchases that closed from April 9, 2008-December 31, 2008. Taxpayers in this category can get a credit up to $7,500. They must repay the amount received under this provision over 15 years, or sooner if they sell their home.
- For qualified home purchases that closed or will close from January 1, 2009-November 30, 2009. Taxpayers in this category can get a credit up to $8,000. They will have no repayment obligation after they have owned and occupied the home for 36 months. (If they sell or move out within 36 months, they must repay the amount received under this provision.)
Taxpayers in either of these two categories face the same income limits. To get the full credit, a single taxpayer can have modified adjusted gross income (MAGI no higher than $75,000; married couples filing joint tax returns can have MAGI up to $150,000. With MAGI up to $95,000 ($170,000 on join returns), qualified homebuyers can get partial credits.
If you were entitled to, but did not claim the credit on your 2008 tax return, you should check into filing an amended return. If you qualify for the credit for 2009, you will want to be sure to claim the credit on your 2009 tax return.
If you have any questions regarding the above discussed topic or any other tax matter, please feel free to give me a call at (562) 698-9891.
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