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:

• Section 3011 of the Housing and Economic Recovery Act of 2008
• Summary of the tax provisions in H.R. 3221 from the Ways and Means Committee [pdf]
• CCH Tax Briefing on the Housing Assistance Tax Act of 2008 [pdf]
• Tax Credit to Aid First-Time Homebuyers; Must Be Repaid Over 15 Years (IRS.gov)
• Expanded Tax Break Available for 2009 First-Time Homebuyers (IRS.gov)