Jessica Jinkens: 7 Things You Need to Know About the Home Buyer Tax Credit

Wednesday, May 13, 2009

7 Things You Need to Know About the Home Buyer Tax Credit

Are you considering buying your first home? Earlier this year, the government decided to provide one of the biggest financial incentives in history to first time home buyers: up to $8,000. Not surprisingly, there are some strings attached, but nowhere near as many as existed for the previous version of the tax credit (commonly known as the 2008 or the $7,500 credit).

Here are the top seven things you need to know about the 2009 first time home buyer tax credit:

You must purchase a home before December 1, 2009.

Only homes purchased during 2009 and before December 1 qualify for the $8,000 credit. It’s possible that Congress and the Obama administration may extend the time period for buying a home to take the credit, of course, but as of right now it disappears entirely on December 1. If you buy an existing home, the key date is when you close on the home. If you are building a new home, you must physically move into the home prior to December 1.

You must purchase a home for the first time.

But the definition of “first-time” is an IRS-speak definition. Say, for example, you purchased a home 10 years ago and sold it five years ago. Then you went off to graduate school. Now you’re thinking about purchasing a home. Believe it or not, for purposes of the credit, you’re a first time home buyer! As long as you haven’t owned a home within three years of the date you purchase a home, you can qualify for this credit.

If you make “too much,” you won’t get as much.

If you’re single and earn more than $75,000 or are married and, together with your spouse, have an income exceeding $150,000, you won’t qualify for the full credit. However, if you make just a little more than these amounts (less than $95,000 and $170,000 respectively), you’ll still qualify for a partial credit.

The maximum credit is $8,000 - sort of.

The maximum credit is $8,000 or 10% of the purchase price, whichever is less. So a $60,000 home, for example, qualifies for only a $6,000 credit.

You don’t have to pay the money back.

Those who took advantage of the 2008 version of the first time home buyer tax credit must pay back the amount they receive over 15 years. However, the 2009 credit does not need to be repaid. Furthermore, the credit is a refundable credit. That’s the IRS’s way of saying that you receive the $8,000 regardless of your total income tax liability for the year. Even if you only made a few grand and your total tax liability was, say $500 for the year, your refund will increase by the full $8,000 credit. Most other credits are not so generous and are limited to your total tax liability.

Well, you might have to pay the credit back.

There’s one key exception to the whole “You don’t have to pay it back” concept: if you sell your home within three years. You might wonder how to avoid this payback requirement. Fortunately, it’s easy: don’t sell your house for three years after you buy it. Flipping houses is so 2005 anyway, no

You can party like it’s nineteen ninety-nine. Not really. But you can pretend it’s still 2008.

If you buy a home between January 1, 2009 and December 1, 2009, you are permitted to consider the home purchased as of December 31, 2008. By doing so, you can claim the credit now. Simply amend your 2008 tax return (by filing Form 1040X) and claim the credit upon closing. You don’t have to wait until April of 2010 to get your refund.

The first time home buyer tax credit doesn’t mean that it’s a no-brainer to buy a home. There are many other considerations. But $8,000 of tax-free income is a pretty big deal. Think about how long you have to work to net eight grand. If you qualify, this first time home buyer tax credit ought to at least get you thinking.

Michael has a post on his that has morphed into a giant Q & A on the first time home buyer tax credit.

Michael B. Rubin is the author of Beyond Paycheck to Paycheck and the blog of the same name. He is the President of Total Candor, a financial planning education company.