First-Time Homebuyer
Credit
Congress recently approved a tax
credit for first-time homebuyers that can be worth up to $7,500. The
credit, however, acts more like a no-interest loan because it must be
repaid to the government over 15 years.
The First-Time
Homebuyer Credit can be claimed on Form 5405, which is filed with your
2008 or 2009 federal tax return.
For the who, what
and how, see the following questions and answers:
Q: What is the
credit?
A: The First Time
Homebuyer Credit is a new tax credit included in the recently enacted
Housing and Economic Recovery Act of 2008. The credit operates like an
interest free loan because it must be repaid over a 15-year period.
Q: How much is the
credit?
A: The credit is
10 percent of the purchase of the home, with a maximum available credit
of $7,500 for either a single taxpayer or a married couple filing a
joint return; $3,750 for married persons filing separate returns. The
full credit is available for homes costing $75,000 or more.
Q. Which home
purchases qualify for the first-time homebuyer credit?
A. Only the
purchase of a main home located in the United States qualifies. You must
buy the home after April 8, 2008, and before July 1, 2009. For a home
that you construct, the purchase date is the first date you occupy the
home.
Taxpayers who
owned a main home at any time during the three years prior to the date
of purchase are not eligible for the credit. This means that first-time
homebuyers and those who have not owned a home in the three years prior
to a purchase can qualify for the credit. If you make an eligible
purchase in 2008, you claim the first-time homebuyer credit on your 2008
tax return. For an eligible purchase in 2009, you can choose to claim
the credit on either your 2008 (or amended 2008 return) or 2009 return.
Q: When must I pay
back the credit?
A: You must begin
repaying the loan the second year after claiming the credit. For
example, if you properly claim the maximum available credit of $7,500 on
your 2008 federal tax return, you must begin repaying the credit by
including one-fifteenth of this amount, or $500, as an additional tax on
your 2010 federal tax return. Normally, $500 will be due each year from
2010 to 2024.
Q. How is the
credit repaid?
A. The first-time
homebuyer credit is similar to a 15-year interest-free loan. It is
repaid in 15 equal annual installments beginning with the second tax
year after the year the credit is claimed. You may need to adjust your
withholding or make quarterly estimated tax payments to ensure you are
not under-withheld.
Some exceptions
apply to the repayment rule:
§
If you die, any remaining
annual installments are not due. If you filed a joint return and then
you die, your surviving spouse would be required to repay his or her
half of the remaining repayment amount.
§
If you stop using the
home as your main home, all remaining annual installments become due on
the return for the year that happens. This includes situations where the
main home becomes a vacation home or is converted to business or rental
property. There are special rules for involuntary conversions.
Taxpayers are urged to consult a professional to determine the tax
consequences of an involuntary conversion.
§
If you sell your home,
all remaining annual installments become due on the return for the year
of sale. The repayment is limited to the amount of gain on the sale, if
the home is sold to an unrelated taxpayer. If there is no gain or if
there is a loss on the sale, the remaining annual installments may be
reduced or even eliminated. Taxpayers are urged to consult a
professional to determine the tax consequences of a sale.
§
If you transfer your home
to your spouse, or, as part of a divorce settlement, to your former
spouse, that person is responsible for making all subsequent installment
payments.
Q: Can I apply
for the credit if I bought a vacation home or rental property?
A: No. Vacation
homes and rental property do not qualify for this credit.
Q: Who is
considered to be a first-time homebuyer?
A: Taxpayers who
have not owned another home at any time during the three years prior to
the date of purchase.
Q: When would I
have had to buy a new home?
A: Only purchases
of a main home located in the United States qualify, and the home must
have been purchased after April 8, 2008, and before July 1, 2008. For
home you construct, the purchase date is the date you first occupy the
home.
Q: How do I apply
for the credit?
A: The credit is
claimed on new IRS Form 5405 and filed with your 2008 federal tax
return.
Q: How are
repayments of the homebuyer credit tracked?
A: A memo field
will be present on taxpayer record and repayment will be tracked over
the 15 year repayment period.
Q: How will the
IRS know if someone sells their residence before the 15 years are up?
A: Through both
self reporting and third-party information.
Q. Are there
income limits?
A. Yes. The credit
is reduced or eliminated for higher-income taxpayers. The credit is
phased out based on your modified adjusted gross income (MAGI). For a
married couple filing a joint return, the phase-out range is $150,000 to
$170,000. For other taxpayers, the phase-out range is $75,000 to
$95,000.
This means the
full credit is available for married couples filing a joint return whose
MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000
or less.
Q: 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?
A: Yes, if you are
a first-time homebuyer of a principal residence in the United States,
you generally may claim the first-time homebuyer credit, but certain
limitations, including a limitation based on modified adjusted gross
income, apply. See Form 5405, First-Time Homebuyer Credit, for more
details.
Q: If two
unmarried people buy a house together, how do they determine how much
each may take of the credit?
A: Two unmarried
individuals buying a principal residence may allocate the credit among
the individual owners in any reasonable manner. The total amount
allocated between the owners may not exceed the smaller of $7500 or 10%
of the purchase price of the house.
Q: Can a person
with an ITIN, who qualifies as a resident, take this credit?
A: Resident
aliens with an ITIN are eligible to take the credit.
Q: I don’t owe
taxes and did not have taxes taken from my paycheck, do I qualify for
the credit?
A: Yes, the
credit is fully refundable, and you can claim the credit even if no
taxes were withheld from your paycheck.
Q. Who cannot take
the credit?
A. If any of the
following describe you, you cannot take the credit, even if you buy a
main 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 stop
using your home as your main home.
- 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.
- Your home
financing comes from tax-exempt mortgage revenue bonds.
- You owned
another main home at any time during the three years prior to the
date of purchase. 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 main home at any time from July 2,
2005, through July 1, 2008.
From the IRS web site
updated Dec. 23, 2008. For more information, go to:
http://www.irs.gov/newsroom/article/0,,id=186831,00.html
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