FIRST TIME HOMEBUYER TAX CREDIT AND EXISTING HOMEOWNER TAX CREDIT
CAVEAT: THIS INFORMATION IS ACCURATE BASED ON INFORMATION AVAILABLE AS OF November 6, 2009. AS WITH ANY TAX LAW CHANGE, CHECK WITH A TAX ADVISOR IF THERE ARE QUESTIONS ABOUT USING THIS PROVISION.
The Basics
1. How does a tax credit work?
Tax credits are special provisions that reduce income tax liability on a dollar for dollar basis. Credits are claimed on an individual's income tax return. In this case, Congress has created a tax credit for first time homebuyers. The maximum credit amount is $8000. Thus, if after figuring out all the income items and exemptions and making all the required additions, subtractions, deductions and other items on a tax return a person had total tax liability of $8500, a $8000 credit would wipe out all but $500 of the tax due.
2. So in the case of this new homebuyer tax credit, what happens if the purchaser is eligible for a $8000 credit but their entire income tax liability for the year is less than $8000?
This new tax credit is a so called "refundable" credit. Thus, if the actual tax liability was $6000, the purchaser would receive a tax credit refund of $2000. The refundable amount is the difference between $8000 credit amount and the amount of tax liability. (The term "tax liability" refers to the actual amount of tax computed on the tax return once all the computations are complete. The individual may already have "paid" their tax liability through withholding, by means of estimated taxes or simply by a check that makes up the difference when there is a shortfall of withholding or estimated tax payments. Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.)
3. Who can use the new tax credit?
Only first time homebuyers are eligible to use the credit. A first time homebuyer is defined as an individual who has not had an ownership interest in a principal residence in the previous three years. The 3 year period is measured as of the date of the purchase of the eligible principal residence.
4. Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Individuals who file a Joint return may have income of no more than $150,000.
5. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
Not always. The credit has a phase out so that the closer a buyer comes to the maximum phase out amount, the smaller the credit will be. For this new credit, the credit amount is gradually reduced as an individual’s income reaches $95,000 (single return) or $170,000 (joint return). Individuals with income above $95,000 ($170,000 joint return) will receive no tax credit.
For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:
Couple's income $165,000 Income limit $150,000 Excess income $15,000
The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount. The denominator is $20,000 (specified by the statute).
In this example, the disallowed portion of the credit is 75% of $8000, or $6000. ($15,000/$20,000 = 75% x $8000 = $6000)
Stated another way, only 25% of the credit would be allowed. In this example, the allowable credit would be $2000. (25% x 8000 = $2000)
6. Is the amount of the credit tied to the price of the home?
Yes. The credit is for 10 percent of the cost of the home, up to a maximum credit of $8,000. If a home cost $65,000, the allowable credit would be $6,500. If a home cost $120,000, the allowable credit would be $8,000. The amount of the credit is the same for all taxpayers, married or single.
7. What's the definition of "principal residence?"
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). The term includes single family detached housing, condos or co ops, townhouses or any similar type of new or existing dwelling.
8. Are there restrictions on the location of the property?
Yes. Eligible property must be located in the United States. Property outside the US is not eligible for the credit.
9. Are there restrictions related to the financing for the mortgage on the property?
Yes. If the financing is obtained by means of mortgage revenue bonds (i.e., through a tax exempt bond related financing program offered by a state housing agency), then the purchaser is not eligible for the tax credit.
10. How do I apply for the credit?
There is no pre purchase authorization, application or similar approval process. Eligible purchasers will simply claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise. In many, if not most cases, the IRS will be on notice that a purchase has occurred because the settlement officer at the time of purchase is required to report the transaction.
11. So I can't use the credit amount as part of my down payment?
Presently, there is no mechanism available for claiming the credit any earlier than the 2008 tax return that will be filed in 2009. Congress tried to devise a mechanism that would allow pre-funding fo the credit, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.
13. So there's no way to get any cash flow benefits before I file my 2008 tax return?
Any first time homebuyers who believe they would be eligible for all or part of the credit may wish to modify their income tax withholding (through their employers) or to adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W 4 from their employer, follow the instructions on the schedules provided and give the completed Form W 4 back to the employer. In many cases their withholding would decrease and their take home pay would increase. Those who make estimated tax payments would make similar adjustments.
16. My sister and I are both single and want to purchase a home together. Will we each receive a $8000 credit?
No. The purchase of a residence will generate a tax credit amount that will total up to no more than $8000, no matter how many unmarried purchasers are buying the house.
17. My sister and I wish to purchase a home together. She previously owned a principal residence but sold it 2 years ago. I've never owned a residence. Can I qualify for a partial credit?
Possibly. The statute is somewhat ambiguous. Note though, that Treasury will no doubt provide guidance to clarify this ambiguity. As it presently stands, the statute specifically provides that for a married couple to be eligible for the credit, both must be first time homebuyers. Similarly, the statute provides that if a married couple files their tax return as Married Filing Separate, then the credit is limited to $4000 each. By contrast, the statute directs the IRS to determine how the credit can be shared when two or more unrelated individuals purchase a home. In that case, the statute does not specify whether all the unrelated purchasers must be first time homebuyers. You'll want to check with a tax advisor.
19. I made an eligible purchase of a principal residence in January 2009. My brother, also a first time homebuyer, wishes to move in with me next year and purchase a partial interest in the home in before July 1, 2009. Will he qualify for the credit, as well?
No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first time homebuyer. If you, as the first time homebuyer, had bought the property from, for example, your grandparents, you would also be disqualified from using the credit.
20. I'm working outside the US for part of 2009, so part of my income will be excluded from tax. I'm single and want to buy a home when I come back (also in 2009). Can I disregard my non taxable overseas income when figuring whether I am eligible for the credit?
No. To determine whether you are eligible for the tax credit, you are required to combine your non-taxable overseas income with any US income you earn in 2009. Thus, for example, if you are single and had $45,000 of non-taxable overseas income and $55,000 of US income, you would be ineleigible for the tax credit because your 2009 income ($100,000) exceeded even the $95,000 phase-out amount. If you had $45,000 of non-taxable overseas income and $40,000 US income, you would qualify for a partial credit because your total income of $80,000 would be within the phase-out amount. If you had $45,000 non-taxable overseas income and $20,000 US income, you would qualify for the full credit (assuming you met all of the other requirements) because your income was less than $75,000.
21 .I live in the District of Columbia and am eligible for the DC Homebuyer Tax Credit. Can I use both credits?
No. You must choose one or the other.
22. Does any portion of the tax credit have to be repayed?
No. On home purchases made between January 1, 2009 and December 1, 2009.
23. How long must I live in the home in order not to have to repay the tax credit?
If home is sold within 3 years of purchase, the entire amount of credit is recaptured on sale. This only applies to homes purchased in 2009.
First Time Home Buyers Tax Credit Loan Program (“TCLP Prefund”)
The HMFA has approved a program to loan eligible First Time Home Buyer Program borrowers up to $5,000 (or up to10% of the purchase price if less) in anticipation of receipt of a federal refundable tax credit shortly after filing of their tax return. Details about the “TCLP Prefund” program are set forth in the First Time Home Buyers Tax Credit Loan Program Prefund Term Sheet.
Important Considerations:
1) The TCLP Prefund is only available with a HMFA Home Buyer Program First Mortgage ( it can be combined with Smart Start).
2) The TCLP Prefund should not exceed the amount of federal tax refund that the Borrower in good faith anticipates receiving. Guidelines for helping the Borrower determine the amount of the federal tax refund are included below. The TCLP Prefund loan application will be submitted to the HMFA Single Family Division for determination of the maximum loan amount and commitment along with the Home Buyer Program mortgage application.
3) The participating lender will fund the TCLP Prefund loan and the HMFA will purchase the loan along with the first mortgage loan.
4) The home must be “closed” between the start date of the program and December 1, 2009.
5) TCLP Prefund is a LOAN that will be secured and must be repaid.
Guidelines for estimating the Tax Credit Refund and TCLP Prefund loan amount:
Married filing separately are entitled to no more than $4,000 per filer and no more than in the $5,000 aggregate for both.
Borrowers with Modified Adjusted Gross Incomes between $75,000 and $95,000 will be eligible for a TCLP Prefund up to prorated amount calculated in accordance with IRS Form 5405.
Borrowers whose tax withholdings are likely to equal or exceed their full federal tax obligation for the tax year and who have no outstanding taxes or penalties to off-set are eligible for the maximum TCLP Prefund. Borrowers who are likely to owe taxes of more than $3,000 will have their TCLP Prefund amount reduced by the amount owed over $3,000.
UPDATE
Congress has extended and expanded the homebuyer tax credit. The modifications in the column labeled “December 1 – April 30, 2010” become effective when President Obama signs the bill. All changes made to the current credit become effective on that date, as well.
| Feature | Jan 1 -November 30, 2009 Rules as enacted February 2009 |
December 1-April 30, Rules as enacted November 2009 |
| Firsttime Buyer – Amount of Credit |
$8000 ($4000 married filing separate) | $8000 ($4000 married filing separate) |
| Firsttime Buyer – Definition for Eligibility |
May not have had an interest in a principal residence for 3 years prior to purchase | Same |
| Current Homeowner – Amount of Credit |
No Provision | $6500 ($3250 married filing separate) |
| Effective Date – Current Owner |
No Provision | Date of Enactment |
| Current Homeowner – Definition for Eligibility |
No Provision | Must have used the home sold or being sold as a principal residence consecutively for 5 of the previous 8 years |
| Termination of Credit | Purchases after November 30, 2009. (Becomes April 30, 2010 on Date of Enactment.) | Purchases after April 30, 2010 |
| Binding Contract Rule | None | So long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close. |
| Income Limits (Note: Increased income limits are effective as of date of enactment of bill) |
$75,000 – single $150,000 – married. Additional $20,000 phase out | $125,000 – single $225,000 – married Additional $20,000 phase out |
| Limitation on Cost of Purchased Home |
None | $800,000 Effective Date of Enactment |
| Purchase by a Dependent | No Provision | Ineligible Effective Date of Enactment |
| Antifraud Rule | None |
Purchaser must attach |
