The Current Homebuyer's Tax Credit

If you are in the market to buy a home this year, then pay attention to the new terms found in the extended version of the First-Time Homebuyer’s Tax Credit as it may open up the door for you to claim this credit even if this isn’t your first home.

We are going to highlight some of the basics first, many of which come straight from the IRS website as key points for taxpayers to know and follow. First, the IRS is in the process of revising Form 5405 – First-Time Homebuyer Credit, which must be filed in order to claim the Credit. The revisions are being completed to reflect the new provisions found in the extended version of the Credit. If you bought your home prior to Nov. 6, then you can still use the old version of Form 5405 to file your claim; any homes bought after Nov. 6 will have to wait until the revised Form 5405 is released. Additionally, the following are some key dates and qualifications to be aware of:

• First-Time Homebuyer – The details here have stayed pretty constant. To qualify as a First-Time Homebuyer you must meet the same qualifications as previous and you are still eligible to take a Credit of up to $8,000 for the purchase of your principal residence.

• On or Before April 30, 2010 – This is the key date to have purchased or to be entered into a binding contract to purchase a principal residence. If only entered into a binding contract, then you must close on the home on or before June 30, 2010.

• Claim Credit on 2009 or 2010 Return – For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

• Long-time Resident now Eligible for Reduced Credit – You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.

• Higher Incomes can now Qualify – The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.

• Purchase Price Limit – No Credit can be applied to the purchase of a home if the purchase price of that home exceeds $800,000.

One’s marital status has a huge effect on how and if the Credit can be claimed. If you have been recently married, divorced or have a pending marriage or divorce, then your situation may require a closer look and the availability of the credit could become difficult to determine. If you find yourself in one of these situations, then please contact your CPA for more information. There are a number of different scenarios to consider, but we are only going to touch on a few here today.

First, for those of you who have been through the process of a divorce, the marital home is considered your principal residence until the divorce is finalized. Therefore, you would need to wait three years from when the divorce was finalized in order to be eligible for the $8,000 portion of the credit. However, you may qualify for the $6,500 portion of the credit. This would be a good time to call your CPA to see exactly where your eligibility stands.

Next, let’s take a look at a newly married couple. Spouse #1 is a long term resident and is a current homeowner and Spouse #2 qualifies as a First-Time Homebuyer (according to the terms of the First-Time Homebuyer Credit) and they have decided to purchase a new principal residence together. In this situation, does this couple qualify for either the $8,000 credit or the $6,500? Rulings and guidance indicate that the answer here is No. To qualify for the First-Time Homebuyer tax credit, then both Spouse #1 and Spouse #2 would have to qualify as a First-Time Homebuyer; the same can be said for qualifying as a long term resident for the $6,500 credit. One question to ask in this situation is can Spouse #2 (the First-Time Homebuyer) amend their previous year return to be able to claim the credit? Contact your CPA as this requires a more in depth analysis of your personal situation.

Outside the realm of marital status, there is one further scenario we want to discuss. If you are a homeowner who qualifies as a “long term resident” for the purposes of claiming the $6,500 Credit, do you have to sell your home in order to qualify? The early answer is No. If you replace your current principal residence with a new principal residence, and if you meet all of the other qualifications, then you may be eligible to claim up to $6,500. The key here is that the new home you purchase is going to be your Principal Residence. It is not important what comes of your old home for the purposes of claiming the Credit.

If you are in the market for a home, please take time to consider whether or not you qualify for either the $8,000 or $6,500 version of the First-Time Homebuyer Credit. This can be complicated to consider, so please contact your CPA to see what your situation holds for your eligibility.

Please join us again next week as Tax season draws closer and we consider some steps you can take to be prepared.

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