Your Tax Questions Answered

FAQs on the New
Home Buyer Tax Credits

We have the answers on the money available, whether you're a first-time buyer or looking to move.

By Kevin McCormally, Editorial Director, Kiplinger.com

November 9, 2009

President Obama has signed into law legislation extending the $8,000 first-time home buyer tax credit beyond its scheduled November 30 expiration and creating a new, $6,500 credit for longtime homeowners who buy a new home. With thousands of dollars at stake, it’s not surprising that potential home buyers have lots of questions. We have the answers.

How does the extension of the first-time buyer credit work?
It’s simple. The old credit was scheduled to expire November 30, so folks who hadn’t already signed a contract faced a daunting task to get a deal closed by the deadline. Some real estate agents were writing provisions into contracts making the purchase contingent on closing in time for the buyer to get the credit. Failing to do so would kill the sale.

Under the new law, the credit is available to qualifying buyers who sign a binding contract by April 30, 2010, and who close by June 30, 2010. The 60-day period should offer plenty of time for last-minute buyers to get to the closing table.

Are the rules exactly the same, except for the later deadline?
Of course not. There are a few differences that apply to deals closed after November 6, the day President Obama signed the bill into law. First though, the similarities:

• The first-time buyer credit isn’t really restricted to first-timers. You’re considered a first-time buyer if you have not owned a home for at least three years prior to the date you settle on your new home.

--The credit is available only for the home you live in. It’s not available for rental properties or vacation homes.

--The credit is 10% of the purchase price of the home, up to a maximum credit of $8,000. Therefore, if the house costs $80,000 or more, you can qualify for the maximum tax credit.

--Unlike the first-time buyer credit that was available in 2008, this credit does not have to be repaid . . . as long as you live in the house for at least three years. Sell or move out before three years, however, and you have to pay back the $8,000 as extra tax on your tax return for the year you sell or move. (The payback can’t exceed the amount of profit you make on the sale, though.)

Now for the key differences:

--You don’t get a credit if the house you buy costs more than $800,000. (There was no price cap for deals closed before November 7.)

More important, the new law increases how much buyers can earn and still claim the credit. For deals closed before November 7, the right to the credit gradually disappeared as adjusted gross income (that’s basically your income before subtracting your personal and dependent exemptions and your standard or itemized deductions) rose between $75,000 and $95,000 on single returns and between $150,000 and $170,000 for married couples who file joint tax returns. Now the phase-out zones are $125,000 to $145,000 for singles and $225,000 to $245,000 for married couples.

When we signed our contract to buy our first home in October, we were kind of bummed because our $190,000 income meant we made too much to qualify for the credit. We won’t close until mid November. Do we get the credit or not?
You’re in luck. The new, higher income limits apply to deals closed after November 6. Enjoy your windfall.

How does the new $6,500 credit work?
This credit is available to qualifying buyers who sign a binding contract by April 30, 2010, and who close on the new home between November 7, 2009, and June 30, 2010. To qualify, you must have continuously owned and lived in a home for at least five of the eight years leading up to the purchase of a new home. If you have owned and lived in your current home for at least five years, for example, you can qualify. If you bought the home you’re living in now less than five years ago, however, you can’t qualify.

The credit is 10% of the purchase price, up to a maximum credit of $6,500. As with the first-time buyer credit, this one is available only for the purchase of a principal residence – not a vacation home or rental property – and if you sell the place or move out within three years, you have to pay back the $6,500 on your tax return for the year you sell or move away. Homes that cost more than $800,000 are ineligible for the credit.

Income-eligibility rules are the same as for the first-time buyer credit. The right to claim the credit disappears as adjusted gross income rises between $125,000 and $145,000 on a single return and between $225,000 and $245,000 for married couples who file joint returns.

It looks as if we qualify for the move-up credit, but we signed a contract to buy our new home before the President signed the new law. We’re going to close at the end of November. Do we get the money?
As long as you close on the deal after November 6, you can qualify for the credit. The new credit is often referred to as a move-up credit.

We are planning to sell our home and retire to a smaller place. Is the credit available only if you buy a more expensive home?
Don’t worry. “Move-up” is a misnomer often used to distinguish this from the first-time buyer credit. It’s okay to downsize. There are no rules about the cost of the house you sell or the home you buy (except that the new house can’t cost more than $800,000).

What do I have to do to claim a credit?
The procedure is the same for both the first-time buyer and longtime resident credits. Once you close on a qualifying house, you claim the credit on your federal income-tax return. If you close in 2009, you can choose whether to claim the credit on the 2009 return you file next spring or on an amended 2008 return. Choosing the amended return route would bring you a refund of the full credit amount. If you claim the credit on your 2009 return, it will reduce your tax bill for the year by the amount of your credit. This is a “refundable” credits so if the credit reduces your tax bill below $0, you’ll get the difference as a tax refund. If you close on a home in 2010, you can claim the credit on either your 2009 or 2010 return. Sooner rather than later is the choice to make.You’ll need to file a Form 5405 to claim the credit and include a copy of your settlement statement (such as the HUD 1 form) to prove that you bought the house. The settlement statement was not required for deals that closed before November 7.

Is it true that there is an age limit for the credit?
Not on the upper end. But as part of an antifraud effort, neither home buyer credit is available to taxpayers under age 18 at the time of the purchase. The discovery that taxpayers as young as four years old were claiming the first-time buyer credit cast suspicion that some hanky-panky was going on. Married couples can qualify for the credit as long as one spouse is at least 18 at the time the deal is closed.

The new law also bans anyone who is claimed as a dependent on someone else’s return from claiming a home buyer credit.

Can I claim the credit for the purchase of a vacation home? How would the IRS know whether I was living there full-time?
The credits are available only for the purchase of a principal residence. As for how the IRS might know a new house was a vacation property, the fact that you tax return was filed from a different address than the address of the new property (which will be shown on the settlement sheet) might raise some eyebrows. If the IRS concludes that a claim is fraudulent, it could impose a 75% penalty, which would cost $6,000 on an $8,000 credit claimed for a vacation home.

We bought a home on October 15, 2003, and sold it in August 2008. So we owned the home for slightly less than five years. We are living in Arizona now and renting an apartment. We are looking to buy a home in Chandler, Ariz. Do we qualify for the first-time home buyer tax credit as amended, assuming that we pass the necessary income tests?
Sorry, but based on the facts you present, you’re out of luck. To qualify for the first-time buyer credit, you can’t have owned a home within the previous three years. You sold your previous home just 15 months ago. And it appears that your ownership of that home was a few months shy of five years – the minimum period of continuous ownership required to qualify for the longtime resident credit.

Can I qualify for both the first-time buyer and longtime resident credits?
No. You can only claim one or the other.

My husband’s parents are offering to sell us their vacation home as our first home. Would we qualify for the first-time buyer credit? Not anymore. The original first-time buyer credit law nixed the credit if the home sale was between related parties, but there was a loophole for the situation you describe. Since you are not related to your husband’s parents – except by marriage – you could have qualified for the credit assuming you bought the home jointly. The new law, however, puts the kibosh on that, effective for purchases after November 6, 2009.

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