First-Time Homebuyer Tax Credit
Up to $8,000 federal tax credit for first-time home buyers
By William Perez,
There's a new, refundable tax credit of up to
$8,000 for the purchase of a primary residence. The credit is available
to first-time homebuyers. Quick Summary of the First-Time Homebuyer Credit
For 2008: up to $7,500, the credit is paid back over 15 years.
For 2009: up to $8,000, the credit does not need to be paid back.
"First-time" buyer means an individual who has not owned a principal residence in previous three years.
Dollar Amounts of the Homebuyer Tax Credit
The tax credit is worth 10% of the purchase price of the home. For
2008, the maximum credit is $7,500 ($3,750 for married couples filing
separate returns). The credit is also limited to the same $7,500
maximum for unmarried persons who purchase a residence together.
For 2009, the maximum credit is $8,000 (or $4,000 for married couples filing separately).
Qualifying as a First-Time Homebuyer
For the purpose of this tax credit, a first-time homebuyer is defined
as someone who has not owned a primary residence in the three-year
period ending on the date of purchasing the home.
Limited Time Period for Purchasing a Residence
The credit has
a very limited life-span. Individuals will need to purchase a residence
after April 9, 2008, and before December 1, 2009.
What's a Primary Residence
A primary residence is a residence
in which an individual lives most of the time. A primary residence can
be a house, condominium, co-operative apartment, houseboat, or mobile
home.
Because the tax credit is for people who purchase their primary
residence, individuals may qualify for the tax credit even if they own
a vacation home or rental property as long as those properties were not
their primary residence for at least three years preceding the purchase
of their new home.
Income Phase-out Range
The credit is phased out for
individuals with modified adjusted gross income between $75,000 and
$95,000. For married couples filing a joint return, the phase out range
is $150,000 to $170,000.
Modified AGI for the First-Time Homebuyer Credit
To determine
if the tax credit is reduced or eliminated by the income phase-out
range, individuals will need to determine their modified adjusted gross
income.
For the purposes of determining income eligibility for this credit,
adjusted gross income is modified by adding back the following excluded
income:
- foreign earned income;
- income from Guam, American Samoa, or the Northern Mariana Islands;
- income from Puerto Rico.
When to Claim the Credit
The credit is fully refundable,
meaning taxpayers will be able to obtain an additional federal tax
refund of up to $7,500 even if they have no other tax liabilities.
Taxpayers will be able to claim the credit on their 2008 tax return
for homes purchased in 2008. For homes purchased in 2009, the IRS will
allow the purchasers to file an amended 2008 return to claim the
credit. For the 2009 tax credit to show up on the 2008 return,
taxpayers will need to elect to treat the 2009 home purchase as if it
were made on December 31, 2008. Guidance released by the IRS
provides that taxpayers making this election are eligible for the
higher $8,000 tax credit amount and do not need to repay the credit if
they take their 2009 credit on their 2008 tax return.
Repaying the First-Time Homebuyer Credit
The credit needs
to be repaid in equal installments over 15 years. Unlike any other tax
credit, the first-time homebuyer credit must be repaid over 15 years.
This pay-back feature applies only to homes purchased in 2008. The
credit will works like this: you'll get your refund when you file the
tax return. Then the credit will be repaid as an additional tax on your
tax return for the next fifteen years, starting with the 2010 tax
return. For the maximum $7,500 credit, this works out to annual
repayments of $500 per year. As CCH notes in their tax briefing, this
tax credit amounts to an interest-free 15-year loan for first-time
homebuyers.
The credit will also need to be repaid in full if the taxpayer
sells the house within the fifteen-year repayment period. The credit
also needs to be repaid in full if the property is no longer the
taxpayer's primary residence. The credit will be disallowed if a
taxpayer sells the house before the end of the same year in which the
house was purchased.
Tax Form to Claim the First-Time Homebuyer Credit
Form 5405 (pdf, 3 pages including instructions)
Sources: