Yesterday, President Barack Obama signed into law a a bill providing tax incentives to prospective homebuyers, extending the first time home buyer tax credit into 2010 and expanding the tax credit to move-up buyers as well. 

Here are the facts you need to share with your home buyers to see if they qualify for the tax credit.

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The American Recovery and Reinvestment Act of 2009 improved on an earlier $7,500 tax credit available to first-time home buyers. The latest tax credit is worth up to $8,000 (or up to $4,000 for married filing separately) for qualified buyers who purchase a principal residence after December 31, 2008 but before May 1, 2010 (extended from December 1, 2009).  Buyers with signed contracts have an additional two months to close until June 30, 2010 and still earn the tax credit.  Qualified buyers are those who have not owned a principal residence during the previous three years. Here are the details:

  • Rebate.  The $8,000 incentive is a true rebate and does not have to be repaid so long as the home continues to be your principal residence for at least 36 months.
  • Refundable.  The $8,000 is also “refundable” — that is, if your tax bill for the year is lower than the credit amount you qualify for, you would receive the difference as a tax refund.
  • Home Price.  The amount of the credit is limited to 10% of the purchase price of the home, up to the $8,000 (or $4,000) limit; thus an $80,000 home would qualify you for the full $8,000 credit. The maximum allowed home purchase is $800,000. 
  • Tax Return. Those who qualify can claim the credit on their federal income tax return.  To combat fraud, a HUD-1 Settlement Statement will have to be attached to the tax return to secure the credit.
  • Income.  The full credit is available to married joint-filers (or equivalent filing status) with Modified Adjusted Gross Income (MAGI) up to $225,000, and to single filers and married filing separately with MAGI up to $125,000. The credit is phased out and disappears completely for MAGIs more than $245,000 (joint filers and equivalent) or $145,000 (others).
  • Military. Military personnel, deployed overseas for a minimum of 90 days in 2008 or 2009, would have until April 30, 2011 to claim the tax credit.

Who Does Not Qualify For The First-Time Buyer Tax Credit?

You cannot claim the first-time home buyer tax credit if any of the following apply, according to IRS tax form 5405:

  • You buy a second home or investment property (only principal residences qualify).
  • You buy a home worth more than $800,000.
  • Your Modified Adjusted Gross Income (MAGI) is $145,000 or more ($245,000 or more if married filing jointly).
  • You acquired your home by gift or inheritance.
  • Your home financing comes from tax-exempt mortgage revenue bonds. This rule does not apply for a home purchased in 2009.
    • You acquired your home from a related person. Related person includes:
      a. Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.)
      b. A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.
      c. A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.
  • Your child or other dependent purchased the home.
  • You are a nonresident alien.
  • Your home is located outside the United States.

 Move-Up B uyers Also Get A Break

Under the new rules, repeat buyers who already own a home qualify for a tax credit too.  A $6,500 maximum credit is available to existing homeowners who have live din their current residence for five of the prior eight years.  The repeat buyer tax credit is limited to purchasing a home worth $800,000 or less.

Using Tax Credit to Pay Closing Costs

In mid-May 2009, the U.S. Department of Housing and Urban Development (HUD) launched a program that would allow federally approved lenders to offer bridge loans to cover closing costs for borrowers who take the 2009 First-Time Homebuyer Tax Credit and who use financing backed by the Federal Housing Administration (FHA). These loans allow buyers who are eligible for the credit to apply those funds towards their downpayments and closing costs, using the credit as collateral.  Once buyers receive the credit after filing their 2009 tax returns, the money will then be used to repay the bridge loan. 

Due to considerable challenges in making these loans widely available, few lenders are currently offering these bridge loans. However, there are still many other funding sources to explore, including:

  • State Housing Finance Agencies
  • Local Governments and Nonprofit Agencies

Let us know how the extended and expanded tax credit will improve sales in your market. How are you informing buyers of the new tax credit changes?

Dan Richard

Emeritus at Gooder Group
Dan is the Founder of the Gooder Group and the author of a series of successful Real Estate books: https://www.amazon.com/Dan-Gooder-Richard/e/B000APPTQK/.

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