There are a lot of great reasons to buy right now, but one of the most incredible advantages for first time homebuyer’s is the tax credit that was passed in recent months as part of the Recovery and Re-investment Act. You have most likely heard of this, but a lot of people aren’t sure how it applies to them!
Previously, the first time homebuyer tax credit allowed up to $7500, was in effect until July 1, 2009, and actually had to be repaid over 15 years, at no interest. Essentially, it was an interest-free loan (still a great thing – but not exactly a ” tax credit!). With the new law, the credit has been changed to 10% of the sales price or $8000 (whichever is lower), has been extended to December 1, 2009, and does not have to be repaid unless you sell your home within 3 years of purchase.
Here are the details:
Who is Eligible
The $8,000 tax credit is available for first-time home buyers only.
The law defines first-time home buyer as a buyer who has not owned a
principal residence during the three-year period prior to the purchase.
All U.S. citizens who file taxes are eligible to participate in the program.
Payback Provisions
The tax credit is a true credit. It does not have to be repaid.
The only repayment requirement is if the home owner sold the home within three
years after the purchase.
Income Limits
Home buyers who file as single or head-of-household taxpayers can claim the full
$8,000 credit if their modified adjusted gross income (MAGI) is less than $75,000.
For married couples filing a joint return, the income limit doubles to $150,000.
Single or head-of-household taxpayers who earn between $75,000 and $95,000
are eligible to receive a partial first-time home buyer tax credit.
Married couples who earn between $150,000 and $170,000 are eligible to receive
a partial first-time home buyer tax credit.
Effective Dates for the Tax Credit
First-time home buyers would receive an $8,000 tax credit for the purchase of any
home on or after January 1, 2009 and before December 1, 2009. To qualify, you
must actually close on the sale of the home during this period.
Tax Credit is Refundable
A refundable credit means that if you pay less than $8,000 in federal income
taxes, then the government will write you a check for the difference.
For example, if you owe $5,000 in federal income taxes, you would pay nothing
to the IRS and receive a $3,000 payment from the government.
If you are due to receive a $1,000 tax refund from the government, your refund
would grow to $9,000 ($1,000 plus $8,000 from the home buyer tax credit).
Buyers can take the tax credit on their 2008 or 2009 income tax return.
Types of Homes that Qualify for the Tax Credit
All homes, whether single-family, townhomes or condominium apartments will
qualify, provided that the home will be used as a principal residence and the buyer
has not owned a principal residence in the prior three years. This also includes
newly-constructed homes.
For more details on the tax credit, go to www.federalhousingtaxcredit.com
In an upcoming post – information on the allowance of lenders to provide short-term bridge loans against the tax credit when FHA-insured financing is obtained.
{ 10 comments… read them below or add one }
what if a qualified first time homebuyer purchases a duplex home,lives in one unit as his principal residence and rents out the other unit, do they still qualify for the whole $8,000 tax credit?
Kevin,
Thanks for the question! The tax credit is based on 10% of the purchase price, or $8,000, whichever is less, and in the case of multiple units, the credit will be based on the percentage of “owner-occupied” space (50% with a duplex). So, the purchase amount of a duplex would have to meet or exceed $160,000 for the purchaser to be able to qualify for the entire $8,000 credit. ($160,000/2=$80,000. 10% of $80,000 is $8,000.)
So, if you meet these criteria, you will qualify for the entire tax credit as a purchaser of a duplex. Hope that helps!
In regards to the above information;
Though I’ve read and heard from many creditable sources that a duplex indeed qualifies. Where are you finding the information that explains the tax credit for multiple units (percentage of “owner-occupied” space)?
I have been trying to find a source for that information and I have not yet. Any information would be helpful.
Thanks,
Cam
Cam,
Thanks for the comment! It is indeed difficult to find information regarding the tax credit and it’s implications for multi-family purchases – if you go to http://www.irs.gov and find form 5405 you will find the following definition of homes qualifying for the tax credit:
Main home. Your main home is the one you live in most of the time. It can be a house, houseboat, house trailer, cooperative apartment, condominium, or other type of residence.
To determine the way the tax credit would be calculated, I contacted my tax professional, who has specifically contacted the IRS to get more information, and this is the explanation that was received.
I’ll be happy to help provide you with any other information! Hope this helps!
I just bought a duplex for $59,000. I am not going to rent out either side. I’m going to occupy both sides and eventually make it into a single family home. Will I be able to receive the entire 10% since I will be living in both sides?
Lanie,
My understanding of how the tax credit is applied to properties is based on the percentage of owner-occupancy, not the actual number of units. So, you should be able to receive the entire 10% – keep in mind that you may need to provide proof that the property is not being rented. There would be penalties if subsequent tax returns showed rental income.
As always, but especially in this case, definitely consult with your tax professional regarding the tax implications of this situation. And congratulations on your purchase! Let me know if you have any other questions.
I’m not sure if you’re still answering questions on this topic. My sister & I bought a duplex together Nov 3, 2009 for 322,000. We are each occupying a side. It seems the way duplexes work for the owner occupied duplexes are that the side that is being lived in is considered the principle residence and the tax credit is applied to that side. In our case, we are each occupying both sides as a principle residence. How would the tax credit work for us? Could we get $8000 each or would we need to split it?
Molly,
I’m happy to answer your questions! Congratulations on being able to take advantage of the tax credit!
You are correct about the credit being based on the owner occupied portion of the property. If you and your sister bought the duplex as a single purchase, and you are both in title, you will be eligible for the whole $8,000 credit, since the whole property is owner occupied, but it would be split between you. The only way you would each qualify for the credit is if the duplex were two units sold separately, and you and your sister purchased them independently of each other.
Please be sure to consult with a professional tax advisor regarding your situation, especially since filing your taxes for 2009 will be a little bit more complicated due to your joint purchase! I wish you the best.
Mellisa
My fiance’s name is on the mortgage for the home we purchased in June 2009. He exceeds the cap for the credit. If my name is on the title and we got married this month (March 2010), can I qualify for my portion of the tax credit??
Allison,
Thanks for your comment! Unfortunately, my understanding of your situation is that since you did not origanally purchase an interest in the property, that you are not eligible for any portion of the tax credit – and since your fiance does not qualify either, neither of you may claim the credit. Here’s an excerpt from the IRS:
Example 3
On April 15, 2008, A pays the entire $100,000 purchase price of a residence and
is the sole owner. Under § 36(b)(1)(A), the allowable credit is not $10,000 (10 percent
of the purchase price) but is limited to $7,500. On May 12, 2008, A transfers a one-half
interest in the residence to B as a tenant in common for $10,000. A may claim the
entire allowable $7,500 credit. Because B acquired B’s interest in the residence from A
in part by gift, B’s basis in the residence is determined under § 1015 by reference to A’s
basis in the residence. Therefore, B did not purchase an interest in the residence within
the meaning of § 36(c)(3), and no portion of the credit may be allocated to B because B
is not eligible to claim any portion of the credit.
This excerpt is from IRS Notice 2009-12, found here – and while it is referencing the original $7,500 credit, my understanding is that the same criteria apply. Here is another link with an IRS Q&A. As always, but ESPECIALLY in your case, make sure to consult with a tax professional or attorney to advise you in your situation. Thanks again, and let me know if you have any other questions!
Mellisa