$8,000 First- Time Home Buyer Tax Credit

Overview of the $8,000 tax credit:

• The $8,000 tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
• The $8,000 tax credit does not have to be repaid.
• The $8,000 tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The $8,000 tax credit is available for homes purchased on or after January 1, 2009 and before July 1, 2010.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full $8,000 tax credit.

Your TOP 38 questions answered:

1. Who is eligible for the tax credit?
   
   First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before July 1, 2010.  The property must also be under contract before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.
    
2. 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 $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS. In contrast, 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 $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
    
3. Is this just for first-time home buyers?
   
   No. The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the 3-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter.
    
4. Is the IRS currently accepting e-filed returns that claim the new $8,000 homebuyer credit in/for the 2008 tax year?
   
   Yes. Taxpayers can file Form 5405, First Time Homebuyer Credit, electronically for home purchases in 2008 to claim the first-time homebuyer credit. IRS began processing these returns electronically on March 30, 2009.
    
5. Does my vaction home or rental home disqualify me?
   
   No. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
    
6. 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 $8,000.
    
7. Are there any income limits for claiming the tax credit?
   
   Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. 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 $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
    
8. 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 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.
    
9. 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 $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
    
10. 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 $160,000. The applicable phaseout to qualify for the tax credit is $150,000, 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 $8,000 by 0.5. The result is $4,000. Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 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 $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800. Note: Always consult your tax advisor for information relating to your specific circumstances.
     
11. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
    
    The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
     
12. How do I claim the tax credit? Do I need to complete a form or application?
    
    Participating in the tax credit program is easy. 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 69 of their 1040 income tax return. No other applications or forms 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 first-time 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.
     
13. 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. 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.
     
14. I plan to build a home and occupy it in 2009. Can I claim the first-time homebuyer credit now and use the funds toward the down payment or other ongoing construction costs?
    
    No. To qualify for the first time home buyer credit, the residence must be purchased. By statute, a residence which is constructed by the taxpayer is treated as purchased on the date the taxpayer first occupies the residence. (05/06/09)
     
15. 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.
     
16. I bought my home in 2009 (early) and filed my 2008 tax return claiming the $7,500 first-time homebuyer credit that has to be repaid. Now the expanded law provides for an $8,000 credit that doesn’t have to be repaid. What do I need to do to get the $8,000 credit that doesn’t have to be paid back?
    
    You can file an amended return with a 1040X form. Consult with a tax advisor to ensure you file this return properly.
     
17. 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 on or after January 1, 2009 and before December 1, 2009. In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
     
18. 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 the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
     
19. I am not a U.S. citizen. Can I claim the tax credit?
    
    Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
     
20. I bought a home in 2008. Do I qualify for this credit?
    
    No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
     
21. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 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 their 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. Further, 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. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community. The National Council of State Housing Agencies (NCSHA) has compiled list of such programs, which can be found here.
     
22. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
    
    Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 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 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
     
23. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, 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 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
     
24. I am in the process of buying a home. I expect to close the deal before December 1, 2009. Can I claim the first-time homebuyer credit now? That would allow me to use the refund for a down payment.
    
    No. You may not claim the credit in anticipation of a purchase that has yet to happen. Until you have finalized the purchase of your home, which for most purchasers occurs at the time of the closing, you do not qualify for the credit. IRS news release 2009-27, First-Time Homebuyers Have Several Options to Maximize New Tax Credit, contains details for filing options if the home is purchased after April 15, 2009.
     
25. When must I pay back the credit for the home I purchased in 2009?
    
    Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009. The obligation to repay the credit on a home purchased in 2009 arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.
     
26. If I claim the first-time homebuyer credit for a purchase in 2009 and stop using the property as my principal residence before the 36 month period expires after I purchase, how is the credit repaid and how long would I have to repay it?
    
    If, within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full amount of the credit is due at that time the income tax return for the year the home ceased to be your principal residence is due. The full amount of the credit is reflected as additional tax on that year's tax return. Form 5405 and its instructions will be revised for tax year 2009 to include information about repayment of the credit.
     
27. I purchased a home that qualifies for the first-time homebuyer credit. I will be renting two of the bedrooms and reporting the rental income on Schedule E. Will I still qualify for the credit if I use the home as my principal residence?
    
    Yes, if you meet all first-time homebuyer eligibility requirements. See Form 5405, First-Time Homebuyer Credit, for more details.
     
28. If two unmarried people buy a house together, how do they determine how much each may take of the credit?
    
    IRS Notice 2009-12 provides guidance for allocating the first-time homebuyer credit between taxpayers who are not married.
     
29. Q: I am a single co-owner of a home. How do I get this credit?
    
    Depending on the year of purchase, you will claim the credit on either your 2008 or 2009 federal income tax return.
     
30. I don’t owe taxes and/or my income is exempt from tax and I do not have a filing requirement. Do I qualify for the credit?
    
    The credit is fully refundable and, if you qualify as a first-time homebuyer, having tax-exempt income will not preclude eligibility. Although there are maximum income limits for qualifying first-time homebuyers, there are no minimum income criteria. Thus, someone with no taxable income who qualifies as a first-time homebuyer may file for the sole purpose of claiming the credit for a refund.
     
31. Does the first-time homebuyer credit apply to homes located in the U.S. Territories?
    
    No.
     
32. Would I be considered a first time homebuyer if I owned a principle residence outside of the United States within the previous three years?

    Yes. A taxpayer who owned a principal residence outside of the United States within the last three years is not disqualified from taking the credit for a purchase within the United States.

33. If qualified, are homebuyers required to claim the first-time homebuyer credit?
    
    No.
     
34. Who cannot take the credit?

    If any of the following describe you, you cannot take the credit, even if you buy a new home:

    • Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
    • You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
    • You do not use the home as your principal residence.
    • You sell your home before the end of the year.
    • You are a nonresident alien.
    • You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
    • Your home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
    • You owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2005, through July 1, 2008.
       
35. Does previously inheriting a home and living in the inherited home automatically disqualify an individual as a first-time homebuyer with respect to a different home that is purchased within the prescribed 2008 and 2009 time frames?
    
    Yes, an ownership interest in a prior principal residence would preclude the taxpayer from being considered a first-time homebuyer. As long as the taxpayer owned and used the prior home as his principal residence, then he is not a first-time homebuyer. There is no exception for taxpayers who did not buy their prior residences. (05/06/09) 
     
36. Is a step-relative considered a related party?
    
    Step-relatives are neither ancestors nor lineal descendents and are therefore not related persons for purposes of the first-time homebuyer credit. (05/06/09)
     
37. If I claim the first-time homebuyer credit in 2009 and stop using the property as my main home before the 36 month period expires after I purchase, how is the credit repaid and how long would I have to repay it? 
    
    If, within 36 months of the date of purchase, the property is no longer used as the taxpayer's principal residence, the taxpayer is required to repay the credit. Repayment of the full amount of the credit is due at that time the income tax return for the year the home ceased to be the taxpayer's principal residence is due. The full amount of the credit is reflected as additional tax on that year's tax return. Form 5405 and its instructions will be revised for tax year 2009 to include information about repayment of the credit. (05/06/09)
     
38. If a person does not actually make the payments on a home that’s their primary residence, but the deed and mortgage documents are in their name, can they be considered a first-time home buyer?
    
    Yes. If a taxpayer purchases a home to be used as a primary residence from an unrelated person and has not owned a home within the previous 36 months, the taxpayer is eligible for the first-time homebuyer credit regardless of who makes the mortgage payment. (05/06/09)

This article for information purposes only. All information derived from IRS.gov. Before making any financial decision always consult with your tax adviser first for accurate and up-to-date information.

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