Buying a Home - New Tax Credit for First Time Home Buyers
If you are considering buying a home, there is a new tax credit available for first time home buyers. This new credit is included in the recently enacted Housing and Economic Recovery Act of 2008. If you have been looking to buy a new home, then you may already know that you will need at least 5% of the purchase price for a down payment. It is hard to know precisely what you will need for closing costs since the specific loan you choose may or may not include points. In addition to that, your closing costs will most likely include an escrow deposit for property taxes and hazard insurance. Although it is hard to know exactly what your costs will be until you get closer to the closing, the amount you pay for closing costs could range from a low of 2-3% to a high of 5-6%.
If you are a first time home buyer, you may be interested to know if you qualify for this new credit, which will help ease the burden of buying a new home. If you are eligible, you may be able to claim a credit of up to $7,500 on your tax return, which will help to reduce your taxes. This tax credit could either reduce your tax bill or increase your tax refund, dollar for dollar.
There are a couple of things that you should know if you are interested in possibly claiming this credit. First, you should begin planning now to take advantage of this credit since it is only available for a limited time. The credit applies to home purchases after April 8, 2008 and before July 1, 2009. Second, the credit will be paid out to eligible home buyers even if they owe no tax or if the credit is more than what they owe in taxes. Among other things, you should know that this new tax credit must be repaid. It basically amounts to an interest free loan that must be repaid over a period of 15-years. For example, if you claim the maximum available credit of $7,500 on your 2008 federal income tax return, you must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on your 2010 tax return.
To qualify for this new tax credit, which is available for a limited time, you must purchase your main home after April 8, 2008 and before July 1, 2009. A vacation home or rental property does not qualify as your main home. To qualify as a first time home buyer when buying a home, you must not have owned a main home at any time during the last three years prior to the date of purchase. If you plan on buying a home in 2008, you can claim the credit on your 2008 tax return. If you plan on buying a home in 2009 before July 1, you can claim the credit on your 2009 federal tax return (or an amended 2008 return).
The amount of the credit is ten percent of the purchase price of your main home subject to a cap of $7,500. For example, if the purchase price of your main home is $125,000, the maximum credit available is $7,500 for a married couple filing jointly or a single taxpayer. The amount of the credit is phased out if your modified adjusted gross income is $150,000 to $170,000 for a married couple filing jointly. For all others, the amount of the credit is phased out if modified adjusted gross income is $75,000 to $95,000.
If your income exceeds the phase out range described above, you will not be eligible to take the credit. In addition to the phase out range, you will not be able to claim the credit for a home purchased from a close relative, if you stopped using the home as your main home, such as if you converted it to a vacation home or rental property, or if you owned another home, which was considered your main home, at any time during the three years prior to the date of your purchase.
As stated previously, the credit for first time home buyers is basically an interest free loan that must be repaid in equal annual installments over a 15-year period. The amount of each payment is included as an additional tax starting when you file your 2010 federal tax return. If you sell your main home or stop using it as your main home prior to making all of your payments, all remaining installments will become due and payable on the return for the year in which you either sold or stopped using the home.
Along with evaluating and obtaining new financing for a new home, first time home buyers should determine whether they qualify for this new tax credit or seek advice from their financial or tax advisor about the application of this credit based on their personal financial situation. This new tax credit can help ease the financial burden of buying a home by reducing your tax bill or increasing your tax refund even if you owe no tax or if the credit is more than what you owe in taxes.
Update:
The American Recovery and Reinvestment Act of 2009 increased the credit for a first-time homebuyer to $8,000 for purchases made in 2009 before Dec. 1.
In addition to the expanded credit amount for a home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the homebuyer’s main residence within a three-year period following the purchase.
First-time homebuyers who purchase a home in 2009 can claim the credit on their 2009 tax return, due April 15, 2010 or on their 2008 tax return by filing an amended return.
Source: Internal Revenue Service; First-Time Homebuyer Credit
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