The Worker, Homeownership, and Business Assistance Act of 2009, sometimes called the Move-up home buyer tax credit, has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009, and on or before April 30, 2010, (or purchased by June 30, 2010, with a binding sales contract signed by April 30, 2010).
The following questions and answers provide basic information about the tax credit. If you have more specific questions, please consult a qualified tax advisor or legal professional about your unique situation.
1. Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat home buyers purchasing any kind of home are eligible to
claim this credit.
2. What is the definition of a move-up or repeat home buyer?
The law defines a tax credit qualified move-up home buyer ("long-time resident") as a has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.
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 a maximum of
$6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.
4. Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5. What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer
must first determine "adjusted gross income" or AGI. AGI is total income for a year
minus certain deductions (known as "adjustments" or "above-the-line deductions"),
but before itemized deductions from Schedule A or personal exemptions are
subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the
first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of
2007). Note that AGI includes all forms of income including wages, salaries, interest
income, dividends and capital gains
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of
foreign-earned income. See IRS Form 5405 for more details.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for
any tax credit?
Possibly. It depends on your income. Partial credits of less than $6,500 are available
for some taxpayers whose MAGI exceeds the phaseout limits.
7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modifi ed adjusted gross
income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.
Here's another example: assume that an individual home buyer has a modifi ed
adjusted gross income of $138,000. The buyer's income exceeds $125,000 by
$13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the
buyer is eligible for a partial tax credit of $2,275. Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specifc circumstances.
8. How is this home buyer tax credit different from the tax credit that Congress
enacted in July of 2008? And how is this different than the rules established in early
2009?
The previous tax credits applied only to first-time home buyers and were for different
amounts of money.
9. 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. Specifi cally, home buyers
should complete IRS Form 5405 to determine their tax credit amount, and then 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 applications are required, and no pre-approval is necessary. However, you
will want to be sure that you qualify for the credit under the income limits and repeat
home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended
purchase for some future date; it must be a completed purchase. Home buyers must
attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as
proof of the completed home purchase.
10. What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The defi nition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences. It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse's family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
11. 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 be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
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