Below is a Q and A from the National Association of Home Builders (NAHB) website about the tax credit, www.federalhousingtaxcredit.com.  Thanks NAHB!

1. What is the definition of a move-up or repeat home buyer?
   The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a home owner who has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.
2. How is the amount of the tax credit determined?
   The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.
3. Are there any income limits for claiming the tax credit?
   Yes. The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
4. What is “modified adjusted gross income”?
   Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

   To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.

5. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
   Possibly. It depends on your income. Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phaseout limits.
6. Can you give me an example of how the partial tax credit is determined?
   Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.

   Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,275.

   Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

7. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different than the rules established in early 2009?
   The previous tax credits applied only to first-time home buyers and were for different amounts of money.
8. How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
   You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns).

   No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.

9. What types of homes will qualify for the tax credit?
   Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

   It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.

10. I read that the tax credit is “refundable.” What does that mean?
    The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

    For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $6,500 home buyer tax credit. As a result, the taxpayer would receive a check for $5,500 ($6,500 minus the $1,000 owed).

11. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
    Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be after November 6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010).

    In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. Be sure to check with a tax advisor in cases where a HUD-1 form is not used at settlement to be sure you have sufficient documentation to attach to IRS Form 5405.

12. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
    Yes. The tax credit can be combined with an MRB home buyer program.
13. I am not a U.S. citizen. Can I claim the tax credit?
    Perhaps. Anyone who is not a nonresident alien (as defined by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
14. Is a tax credit the same as a tax deduction?
    No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.

    A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.

15. Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
    Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.

    Buyers should adjust the withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

    In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.

16. HUD allows “monetization” of the tax credit. What does that mean?
    It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.

    Under the guidelines announced by HUD, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.

    Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.

    In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.

    More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.

17. If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
    Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

    Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.

18. For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
    Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.

**As always, be sure to consult with your tax professional and/or attorney regarding the legal and tax implications of any purchase.

In what feels like great relief after a hard fought battle, the House of Representatives voted almost unanimously this morning (403-12) to extend the existing first time homebuyer tax credit.  Here are some of the details:

“The new tax credit extends the existing credit for first-time homebuyers, worth up to $8,000, and offers a new credit of up to $6,500 for some existing homeowners.

The reduced credit for existing homeowners is available to those who have been in their current residence for a consecutive five-year period.

The new rule also raises the qualifying income limits to $125,000 for single taxpayers and $225,000 for joint taxpayers, from the current $75,000 and $150,000.

The maximum allowed home purchase price is $800,000.

A home buyer must have a sale agreement in hand by April 30 and close escrow by June 30, 2010.”  Excerpted from this article.

President Obama is expected to sign the legislation as early as tomorrow (Friday, November 6th).  In a memorandum I received from the National Association of Home Builders (NAHB) this morning, comments regarding the finality of this extension were reviewed:

Even as Congress neared completion on the legislation, proponents made it perfectly clear that the home buyer tax credit would not be extended when it expires next year. Sen. Johnny Isakson (R-Ga.), a long-time champion of the home buyer tax credit, said: “This is the last extension of the home buyer tax credit. Tax credits like this only work by creating the sense of urgency to take advantage of it, and to bring the market back.”

On the floor of the Senate, Finance Committee Chairman Max Baucus (D-Mont.) said that, “It’s important that this tax credit does not become a permanent fixture in the tax code. Our amendment would end the credit on April 30 of next year. This extension would get us through the winter – traditionally the worst season for real estate. Our amendment would jump-start the housing market as it enters the summer months of 2010.” Baucus added that the seven-month extension of the tax credit would be “long enough to encourage home buyers to buy homes, but it’s short enough to remain fiscally responsible.”

All in all, it’s great news, especially for those who had hopes of taking advantage of the tax credit but simply could not make the deadline!  Also, current homeowners who were previously excluded from the credit will now be able to take advantage as well, if they meet the criteria.  While criticism of this credit and it’s extension abound, within both the political and real estate worlds, there is no doubt that each taxpayer that is able to claim the credit will certainly benefit.  Long term, will it help boost our real estate market, and on a grander scale, our economy?  Only time will tell.

More on this topic coming – please contact me if you have any questions about the credit and how it may help you move towards your goals!

UPDATE: This morning, November 6th, 2009, President Obama signed into law legislation that officially extends and expands the tax credit – among other things.  For more details, visit here.

Do you ever think about your long term financial goals? Are the concepts of investment growth or wealth creation a regular part of your vocabulary and decision making? Or are you, like so many of us, blindly hoping that you ll make it through retirement? That somehow, it ll all just work out?

The goal of this post is to make you, the homeowner (or person considering homeownership) think. Think about what your financial decisions are doing to create wealth for you over the long term. Think about how traditional and seemingly common-sense ideas can actually stunt the growth of your wealth, and how you can begin to change the direction of your financial future.

A lot of people will tell you (especially real estate and mortgage professionals) that investing in real estate is a very safe form of investment (over the long term) with an excellent ROI (return on investment). Coupled with this is the long-standing sentiment that the more money you can put into your home, the safer your investment will be. The more equity you have, the more protected you will be from short term depreciation, if that should happen (let’s hope not!s). We also have had the notion of mortgage bad, cash good passed down to us, and as a result, many American homeowners primary goals are to borrow as little as possible, and to pay off their mortgage quickly.

Important Questions to Ponder

Ask yourself the following question though how accessible is the money (equity) that is sitting inside your house? In other words, how liquid is it? Do you have the ability to access this wealth quickly in case of an emergency, necessary repairs, etc? This equity may be a combination of the money that you used for your down payment, and any appreciation that has occurred since you purchased.

Now, ask yourself this question does the amount of money that you used for a down payment have any effect on the value of your home in 10, 20, or 30 years? We are all hoping, despite current market conditions, that the value of our homes will appreciate over the long-haul. The common understanding is that by putting down $20,000 on a $100,000 home (20%) that appreciates on average 6.2% per year, that we are earning 6.2% on our investment (of $20,000).

In reality, that home will appreciate 6.2% (assumed scenario) a year whether you put 20% down or not. Now, imagine that instead of putting down that $20,000 on your home purchase, you had invested it in a diversified portfolio account with a trusted financial advisor. Let s say the interest rate on your mortgage (in this case, you re borrowing the full $100,000) is 7%. Depending on your federal tax bracket, your EPR (effective percentage rate)*** on your mortgage might be around 4.750% (read below).

What It Really Comes Down To

Now, listen carefully people want to borrow less money from the bank because they will save money on interest. But, in the above scenario, you would only have to average 4.750% in your investment account with your financial advisor to come out ahead. Let me sum that up for you if you had invested the $20,000 in an investment account with an average return of 4.750% or greater instead of making a down payment, you would be creating more wealth long term. Do you think this kind of rate of return might be possible? A conversation with a financial advisor would show you that over the long term, with sound investment strategies, this would be a reasonable goal.

In fact, what do we mean by come out ahead ? Well, let s look at the numbers. That $20,000, invested for 30 years at an 8% rate of return will grow to $201,253.14 (assumed scenario). Now, remember that you still own the home. It has appreciated, after 30 years, to a value of $400,000, and would have done so whether you made a down payment or not. However, because you invested the $20,000 instead of making a down payment, you now have an additional $201,253.14, and your total net worth is $601,253.14 instead of just $400,000.

Wait a Second

So now what you re thinking is, this woman is saying that investing in real estate isn t a good idea? If I can get a greater rate of return elsewhere that s where I m going to put my money! Hold on a second. The missing piece is an important concept called leverage. Have you ever tried to walk into the bank and ask them for a loan of $100,000 to put into your investment account? Well, no, you probably haven t! And if you have, you didn t succeed!

The difference is just this a lender will lend money against an asset like a home, giving you the power of leverage to watch that asset grow, even though you didn t have the means to purchase it. As your home appreciates, you even have the ability to draw some of that equity out, and invest it elsewhere with a greater rate of return. At the end of the day, this will only increase your net worth and help to prepare you for retirement and other goals that you may have.

This is just a very basic introduction to these concepts if any of this rings true for you, or tugs at your curiosity, I would love to talk with you about what your options may be.

**Keep in mind that I am not accounting for any additional investments being made. I am also not accounting for inflation. The goal of this post is just to introduce you to the concept there are many other details involved, and you should always consult your financial advisor and tax advisor/CPA

***Your EPR is determined by multiplying the interest rate you are paying by your federal+state tax bracket, and subtracting the difference. Example 7% interest rate, 34% tax bracket (25% federal, 9% state).
7 x 34% = 2.38.
7 2.38 = 4.62.
EPR = 4.62%

These ideas are not just mine they have been developed and practiced by a trusted colleague of mine. Trevor Hammond is the CEO and Founder of Makena Financial Strategies, a mortgage planning and financial education company here in Portland. Trevor co-wrote a book called Borrow Smart, Retire Rich , and it is full of wealth creation strategies using real estate as a tool. I highly recommend Trevor and his team as financial partners on the homeownership journey. www.makenafinancial.com