First Time Homebuyer $8,000 Tax Credit

One of the many reasons why first time homebuyers should be looking to buy soon is this great tax credit. It does not apply to everybody, or every house, but it applies often enough that we certainly need to understand if it will work for us. Of course, you should contact the IRS or your tax advisor to be sure about the credit rules and your circumstances, but here are some of the basics.

1. You may qualify even if you have owned a home before. The rule is if you haven’t owned a home in the last 3 years, you too are a “first time homebuyer”.

2. The credit is 10% of the purchase price, up to $8,000. So if you buy a $60,000 home, the most you can receive is $6,000. Since most of the homes in the Triangle are over $80,000, most first time home buyers will get the full $8,000 credit.

3. This credit is available for home sales closed between Jan. 1 and Nov. 30, 2009 only. Who knows if something similar will be available afterwards. Buy now and avoid the risk!

4. This is only for personal residences, not rental or other investment property, not vacation homes. You have to live in it, for at least three years, or pay the credit back. So, if you sell it before three years, or if you convert it to a rental before three years, you have to pay back the credit.

5. If you are an individual with an Adjusted Gross Income of $75,000 or less, you can earn the whole credit. If you make more than that, the credit gets reduced based on how much more you earned, disappearing entirely at $95,000. Same deal for joint tax return filers but the reduction starting point is $150,000, and the credit is gone at $170,000.

6. Look at IRS Form 5405 to see the surprisingly simple form for figuring your credit. It is only 3 pages long, including instructions, but be careful. It covers both the $7500 repayable 2008 tax credit (really a loan) AND the 2009 $8000 tax credit (a gift!). So make sure you read the parts that apply to the 2009 gift, not the 2008 repayable loan.

7. And a neat trick: if you buy in 2009 you can amend your 2008 tax return, re-file, and get the credit quickly, rather than waiting until early 2010 to file for it on your 2009 return! See line C on Form 5405. Which can also make a difference if you made less than $75,000 in 2008 but think you will make more in 2009 (see point 5 above).

8. People who are married but file separately instead of jointly can each claim up to $4,000 if all of the above rules fit. What isn’t clear, to me, is what if one of this married couple qualifies under the rules but the other doesn’t. Can the one who qualifies claim the $4,000, or do they both have to qualify. For example: you two got married in 2007, and one of you owned a home and sold it just before the wedding so you two could move here. The other has never owned a home. Can you get half the credit? Not sure! Ask your tax advisor …

9. Can you get the money in time to use it for your downpayment? Or convince the lender to count it in your assets before you have it to improve your ratios? No.  It seems odd, since the whole point was to stimulate home purchases, but you have to be able to buy a home without the credit in order to get the credit. The credit comes after closing, probably a couple months after, not in time to help with the purchase. But it can still come in handy afterwards!

10. The credit is actually paid to you by the IRS.  For example, if you have had enough money withheld from your paycheck to exactly pay all the income taxes you owe, you will get a check from the IRS for $8,000.  Or, if you owe $1,000 on your taxes, you will get a check for $7,000.

10. What if you are buying a home, expect to close by Nov 30, but somebody moves slow and closing gets delayed to Dec. 1 or later. Can you still get the credit? No! You really must close by Nov. 30. That’s another good reason to use a Buyer’s Agent, someone who has been through the process many times and can help keep your purchase on schedule.

I had a closing last week where a first time homebuyer bought a home using a VA loan.  His total amount of cash to buy the home was just over $3,000.  He was going to file his tax return right away, and get $8,000 back.  There are not many better deals than to buy your first house, put in $3,000, then get all your money back plus an additional $5,000 bonus.