Most Frequently Asked Questions on 1st Time Home Buyer Credit
Most Frequently Asked Questions on 1st Time Home Buyer Credit
The First-Time Home Buyer Tax Credit that has been Extended andExpanded allows up to $8,000 for qualified first-time home buyers purchasing aprincipal residence. The tax credit now applies to sales occurring on or afterJanuary 1, 2009 and on or before April 30, 2010. However, in cases where abinding sales contract is signed by April 30, 2010, a home purchase completedby June 30, 2010 will qualify.
For sales occurring after November 6, 2009, the Act establishes income limitsof $125,000 for single taxpayers and $225,000 for married couples filing jointreturns.
The income limits for sales occurring on or after January 1, 2009 and on orbefore November 6, 2009, are $75,000 for single taxpayers and $150,000 formarried taxpayers filing joint returns.
The following questions and answers provide basic information about the taxcredit. If you have more specific questions, we strongly encourage you toconsult a qualified tax advisor or legal professional about your uniquesituation.
1. Who is eligible to claim the $8,000 Tax Credit?
First-time home buyers purchasing any kind of home—new or resale—are eligiblefor the tax credit. To qualify for the tax credit, a home purchase must occuron or after January 1, 2009 and on or before April 30, 2010. For the purposesof the tax credit, the purchase date is the date when closing occurs and thetitle to the property transfers to the home owner. A limited exception existsfor certain contract for deed purchases and installment sale purchases.
However, the law also allows home sales occurring by June 30, 2010 to qualify, providedthey are due to a binding sales contract in force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are under age18 are not qualified for the tax credit program.
2. What is the definition of a first-time homebuyer?
The law defines “first-time home buyer” as a buyer who has not owned aprincipal residence during the three-year period prior to the purchase. Formarried taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.
For example, if you have not owned a home in the past three years but yourspouse has owned a principal residence, neither you nor your spouse qualifiesfor the first-time home buyer tax credit. However, IRS Notice 2009-12 allowsunmarried joint purchasers to allocate the credit amount to any buyer whoqualifies as a first-time buyer, such as may occur if a parent jointlypurchases a home with a son or daughter. Ownership of a vacation home or rentalproperty not used as a principal residence does not disqualify a buyer as afirst-time home buyer.
3. How is the amount of the Tax Credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to amaximum of $8,000.
4. Are there any income limits for claiming the Tax Credit?
Yes. For sales occurring after November 6, 2009, the income limit for singletaxpayers is $125,000; the limit is $225,000 for married taxpayers filing ajoint return. The tax credit amount is reduced for buyers with a modifiedadjusted gross income (MAGI) of more than $125,000 for single taxpayers and$225,000 for married taxpayers filing a joint return. The phase-out range forthe tax credit program is equal to $20,000. That is, the tax credit amount isreduced to zero for taxpayers with MAGI of more than $145,000 (single) or$245,000 (married) and is reduced proportionally for taxpayers with MAGIsbetween these amounts.
5. The income limits for claiming the Tax Credit were raised when the Tax Credit was extended. Are the higher limitsretroactive?
No. The new income limits are only applicable to purchases occurring afterNovember 6, 2009.
The income limits for sales occurring on or after January 1, 2009 and on orbefore November 6, 2009 are $75,000 for single taxpayers and $150,000 formarried couples filing jointly.
6. How is this home buyer tax credit differentfrom the Tax Credit that Congress enacted in early 2009?
The tax credit’s income limits were increased, the documentation requirementswere tightened, and the program's deadlines were extended.
7. How do I claim the Tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, homebuyers should complete IRS Form 5405 to determine their tax credit amount, andthen claim this amount on line 67 of the 1040 income tax form for 2009 returns(line 69 of the 1040 income tax form for 2008 returns). No other applicationsare required, and no pre-approval is necessary. However, you will want to besure that you qualify for the credit under the income limits and first-timehome buyer tests. Note that you cannot claim the credit on Form 5405 for anintended purchase for some future date; it must be a completed purchase. Homebuyers must attach a copy of their HUD-1 settlement form (closing statement) toForm 5405 as proof of the completed home purchase.
8. What types of homes will qualify for the Tax Credit?
Any home that will be used as a principal residence will qualify for thecredit, provided the home is purchased for a price less than or equal to$800,000. This includes single-family detached homes, attached homes liketownhouses and condominiums, manufactured homes (also known as mobile homes)and houseboats. The definition of principal residence is identical to the oneused to determine whether you may qualify for the $250,000 / $500,000 capitalgain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among otherfamily members, your ancestors (parents, grandparents, etc.), your linealdescendants (children, grandchildren, etc.) or your spouse or your spouse’sfamily members. Please consult with your tax advisor for more information. 
9. I read that the tax credit is “refundable” What does that mean?
The fact that the credit is refundable means that the home buyer credit can beclaimed even if the taxpayer has little or no federal income tax liability tooffset. Typically this involves the government sending the taxpayer a check fora portion or even the entire amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the taxcredit, federal income tax liability of $5,000 and had tax withholding of$4,000 for the year, then without the tax credit the taxpayer would owe the IRS$1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000home buyer tax credit. As a result, the taxpayer would receive a check for$7,000 ($8,000 minus the $1,000 owed).
10. Instead of buying a new home from a homebuilder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence thatis constructed by the home owner is treated by the tax code as having been“purchased” on the date the owner first occupies the house. In this situation,the date of first occupancy must be on or after January 1, 2009 and on orbefore April 30, 2010 (or by June 30, 2010, provided a binding sales contractwas in force by April, 30, 2010).
In contrast, for newly-constructed homes bought from a home builder,eligibility for the tax credit is determined by the settlement date.
11. I am not a U.S. Ctizen. Can I claim the Tax Credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who hasnot owned a principal residence in the previous three years and who meets theincome limits test may claim the tax credit for a qualified home purchase. TheIRS provides a definition of “nonresident alien” in IRS Publication 519.
12. Is a Tax Credit the same as a Tax Deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes.That means that a taxpayer who owes $8,000 in income taxes and who receives an$8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Usingthe same example, assume the taxpayer is in the 15 percent tax bracket and owes$8,000 in income taxes. If the taxpayer receives an $8,000 deduction, thetaxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), orlowered from $8,000 to $6,800.
13. I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1,2009, you may qualify for a different tax credit. Please consult with your taxadvisor for more information.
14. Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or2010 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit arepermitted to reduce their income tax withholding. Reducing tax withholding (upto the amount of the credit) will enable the buyer to accumulate cash byraising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employeror through their quarterly estimated tax payment. IRS Publication 919 containsrules and guidelines for income tax withholding. Prospective home buyers shouldnote that if income tax withholding is reduced and the tax credit qualifiedpurchase does not occur, then the individual would be liable for repayment tothe IRS of income tax and possible interest charges and penalties.
HUD is now allowing"monetization" of the tax credit. What does that mean?
It means that HUD allows buyers using FHA-insured mortgages to apply theiranticipated tax credit toward their home purchase immediately rather thanwaiting until they file their 2009 or 2010 income taxes to receive a refund.These funds may be used for certain down payment and closing cost expenses.
Under HUD’s guidelines, non-profits and FHA-approved lenders are allowed togive home buyers short-term loans of up to $8,000. The guidelines also allowgovernment agencies, such as state housing finance agencies, to facilitate homesales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue taxcredit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement. In addition, approved FHA lenders can purchase a homebuyer’s anticipated tax credit to pay closing costs and down payment costsabove the 3.5 percent down payment that is required for FHA-insured homes.
15. If I’m qualified for the tax credit and buya home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified homepurchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008(or if in 2010, December 31, 2009). This means that the previous year’s incomelimit (MAGI) applies and the election accelerates when the credit can beclaimed. A benefit of this election is that a home buyer in 2009 or 2010 willknow their prior year MAGI with certainty, thereby helping the buyer knowwhether the income limits will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return, butwho have already submitted their tax return to the IRS, may file an amendedreturn claiming the tax credit using Form 1040X. You should consult with a taxprofessional to determine how to arrange this.
16. For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
Yes. If the applicable income phase-out would reduce your home buyer tax creditamount in the present year and a larger credit would be available using theprior year MAGI amounts, then you can choose the year that yields the largest credit amount.
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