Repeat and Reep the Benefits - Tax Credit Bonanza for Repeat Buyers

The President of the United States signed legislation on November 6^th, 2009 that became effective immediately, allowing current homeowners, or ‘repeat buyers' to claim a tax credit of up to $6,500 for the purchase of a replacement home.

This is the same law that extended the current $8,000 tax credit to first time homebuyers and raised household income levels.  This article will focus on the repeat buyer aspect of the bill.

THE BASICS

Before we get into how it works, lets figure out who it works for.  It should be pointed out right now that there is no requirement to ‘move-up' at all and I suspect by the time this is over and done with most of these credits will be awarded to those who are actually downsizing...more on this later.

The first criteria are that the repeat buyer MUST have resided in their current home for five of the last 8 years.  Second qualifier is that your adjusted household income does not exceed the limits imposed of $125,000 for the single filing taxpayer or $225,000 for those who are married and filing jointly.  If your income is higher than this, please consult with your tax professional because there are some very complicated formulas that allow for some taxpayers to obtain partial credits.

The time frame for this Tax Credit starts with homes that closed escrow on November 6^th, 2010 - the day President Obama signed the legislation and runs through next spring with two very significant dates.  The first is April 30^th, 2010.  The implication of this date is that a binding contract (signed by all parties) must have been reached.  The law allows the repeat buyer until June 30^th, 2010 to actually close escrow.

Just because the current tax credit was extended and revised by Congress, I would not count on a further extension.  This was a much debated topic in Washington and across the country.  While it is a good deal for those who take advantage of the opportunity there are many that feel the stimulus that it encourages does not justify the ultimate price tag to the American Taxpayer.  So as my grandma used to say, "You Better Get While the Getting is Good!".

The good news is the tax credit can be claimed as soon as you close escrow.  So, if you close this year you can claim the credit on your 2009 tax returns or amend the ones you filed for 2008. If escrow closes in 2010, you will have a similar option of claiming the tax credit for your 2009 taxes or file with your 2010 return.  This is one of those times I MUST ADVISE YOU to talk with your tax professional and see how this applies to YOU!  There may be beneficial strategies to pursue regarding your income for both years - so if you anticipate buying a home and taking advantage of this program, I strongly suggest you do so before you make the purchase.

WHAT ELSE YOU NEED TO KNOW

When looking for your new home, the purchase price cannot exceed $800,000.  The good news in the Hemet-San Jacinto, CA Valley is that real estate averages round $150,000 for a nice newer home in a good neighborhood...almost anywhere in the valley!

The actual tax credit is computed based on the purchase price of the new home.  The tax credit for the repeat buyer is computed at 10% of the purchase price with a maximum credit of $6,500.  So, a home bought for $150,000 would cap out at the $6,500 limit - short of the $15,000 10% rule.  On the other hand a buyer who might be downsizing and possibly buying an existing mobile home for say, $40,000 would only be able to claim 10% of the purchase price or $4,000.

As mentioned earlier, the requirement to sell your current home does not exist; however, your new home MUST become your primary residence.  This is great news because it will allow for current homeowners to rent out their current home, keeping it as a nest egg while allowing them to buy near the bottom of the market and take advantage of the current market conditions.

I strongly recommend that if you are keeping you old home that you plan on moving THE DAY escrow closes.  With the original tax bill, there have been countless abuses of fraud and you don't want the IRS taking a look at your claim - just do it right and there should not be any questions asked.

WHAT CAN YOU BUY?

The good news is that just about anyplace you want to call home qualifies (again, so long as the price tag does not exceed $800,000).  Both new construction and existing inventory of homes qualify and it does not matter if it is a single-family home, a condo, a townhouse, a mobile or manufactured home...or even a boat that becomes your principal residence.  I have nothing solid on this, but my guess is even RVs that are principal residences will count for the credit.

The tax credit can even be applied for custom-built homes, so long as they receive their ‘certificate of occupancy' and the home becomes occupied within the specified timeframe and the custom built home does not cost more than the $800,000 limit.  If the taxpayer, prior to the specified tax periods, owned the land it is my understanding that the value of the land is not computed in the value of the home.  Again, check with your personal tax advisor.

WHAT YOU CANNOT BUY

Second homes, which are popular in the Hemet - San Jacinto Valley with the ‘Snowbirds' are not eligible. 

Real Estate Investors have been a significant part of the market over the last couple of years and unfortunate for them, investment properties don't qualify, either.

RED FLAG  - CAUTION - RED FLAG

Just like anything with the government you need to be careful that you play by their rules.  Don't try and second guess with words like ‘intentions' and ‘good faith' to defend your actions.  I figure if you have to ask if something is wrong, then you know in your heart that it is wrong - so avoid it.  Don't try to figure out how to make it work for you and DON'T suck me into your schemes - that's called CONSPIRACY.  

While some will get away with stepping to close to the line, or even over the line it just is not worth it.  Once the government thinks you are not playing by their rules they can get very anal in their pursuit.  Any false representation on any federal document is a federal crime - they call it fraud for starters and may find some other very creative ways of redefining it...each adding their own penalties and possible jail time.

The IRS is the long arm of Congress responsible for monitoring this program.  With the new legislation, the IRS is tasked with even closer scrutiny of the program due to the overwhelming fraud that was uncovered with the original program   According to the Wall Street Journal, the IRS is investigating over 100,000 suspicious first time homebuyer tax credits...that 10% of the million plus claims already filed.  As of about a month ago, the IRS has opened investigations on 167 separate ‘criminal schemes' and has already obtained its first conviction.

The new rules now require the taxpayer to include copies of the closing statement, or HUD-1) issued by escrow at the close of escrow along with the IRS Form 5405, the form used for requesting tax credits.

Minors are not eligible or anyone being claimed as a dependent on another's tax return.  So, say a college student being claimed by the parents on the parents tax return is not eligible if they want to take advantage of the tax credit.  Believe it or not, but the IRS has uncovered claims filed in the name of a four year old.

Transactions between family members are also disallowed and will throw the red flag right into the face of the IRS

STRATEGIES

There are numerous strategies that can be implemented to maximize the benefit of this program - again each repeat buyer has their own unique set of circumstances and because this is an article on taxes and real estate, all I am only licensed to guide you on is your real estate game plan.  If you need to talk to a good tax guy, I have a local one who is great and will probably uncover additional tax credits for you that   Of course reading this article should not be considered advise if I have never met you.  This article is written for the public and not any one client...so please lets use this article as a place to open a dialogue and not a blueprint for your own real estate moves.

With that being said, I believe that what will open up in the Hemet - San Jacinto, CA Valley real estate market will be repeat homebuyers who will look at keeping their current homes and turning them into rental...perhaps to family members and then buying a much newer home in a newer neighborhood with modern amenities and features.

I'm sure we will see a significant number of both move-up repeat home buyers as well as buyers looking to downsize who had felt trapped in a larger home after the kids had left the nest starting their own homes but leaving mom and dad with the family castle.  Of course with the hit to the economy, the castle may now be considered obsolete for their needs.  Well, now there is an out. Rent the existing home, which should cash-flow (assuming it has not become over-indebted with refinances) nicely and then move into something more appropriate for the downsized family. 

This scenario will allow for the current home to remain in the family and give it a chance to regain equity at a future point while also allowing for the purchase of a newer home near the bottom of the market that will also increase in value and thus being able to take advantage of the market for a future retirement.

In any event, there are many situations...just like everyone who reads this there are unique strategies that feet unique needs...so call and lets figure out how you can best capitalize on the current real estate boom market now...before it's too late.