Information regarding the $7,500 tax credit for first time homebuyers...

By
Real Estate Agent with Winter Garden, Florida

Here is some information that was sent to me regarding this new tax credit. I hope that this will answer some questions that you may have. For me it has answered most of my questions and added some new ones. So here it is:

Builders Can Use New Tax Credit to Help Spur Home Sales<!--headend -->

Prospective first-time home buyers who have been sitting on the fence now have a significant financial incentive to explore the opportunities available in today’s housing market.

H.R. 3221, the Housing and Economic Recovery Act of 2008 — which has just been passed by the Congress and now is on its way to President Bush for his signature — allows first-time home buyers to take a $7,500 tax credit from the purchase of a single-family home, townhome or condominium apartment.

To get the word out to the home-buying public, NAHB has assembled materials that will help association members maximize the impact of this temporary sales incentive.

Among those resources:

  • Once the new legislation has been signed, NAHB will activate a Web site for consumers — www.federalhousing taxcredit.com. The site includes details and questions and answers on how home buyers can use the credit.
  • On www.nahb.org/mythbuster, NAHB is posting talking points, print ads, a consumer handout on the “top reasons you shouldn’t wait to buy a new home,” and a banner ad for Web sites — all geared to alerting home buyers to the availability of the credit.


Any home buyer who has not owned a home during the past three years and is a U.S. citizen who files taxes is eligible to participate in this program. (Some home buyers who are not citizens may also qualify; see #14 in the questions and answers below.)

To qualify, buyers must actually close on the sale of the home on or after April 9, 2008 and before July 1, 2009. The original eligibility period expired in April 2009, but following a major grassroots campaign from NAHB members, the period was extended to enable home builders to include the credit in their sales and marketing next spring and into the early summer — the peak home buying season.

The program does have income limits. Single or head-of-household filers can claim the full $7,500 credit if their adjusted gross income (AGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000.

Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit. The same applies to married couples who earn between $150,000 and $170,000.

The credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI exceeding $170,000.

A refundable credit means that if a taxpayer pays less than $7,500 in federal income taxes, the government will write them a check for the difference. For example, if $5,000 in federal taxes is owed, the taxpayer would pay nothing and a $2,500 payment would be received from the IRS. If a qualifying home buyer were owed a $1,000 tax refund, they would receive $8,750.

Buyers can take the tax credit on their 2008 or 2009 tax return. Those who close in 2008 take the credit on their 2008 return. Buyers in 2009 have the option of taking the credit on their 2008 or 2009 returns

Questions and Answers for Consumers

Following are the “Frequently Asked Questions About the First-Time Home Buyer Tax Credit” that will appear on NAHB’s consumer Web site (www.federalhousingtaxcredit.com). The site will become active as soon as the housing legislation is signed into law.

1. Who is eligible to claim the $7,500 tax credit?

First time-home buyers purchasing any kind of home — new or resale — are eligible for the tax credit.

2. What is the definition of a first-time home buyer?

The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase.

3. What types of homes will qualify for the tax credit?

Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses, and condominiums.

4. Are there income limits to determine who is eligible to take the tax credit?

Yes. Home buyers who file their taxes as single or head-of-household taxpayers can claim the credit if their modified adjusted gross income (MAGI) is less than $75,000. For married taxpayers filing a joint tax return, the MAGI limit is $150,000. The limit is based on the buyer’s modified adjusted gross income for the year that the house is purchased, except for certain purchases in 2009. 

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, which 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 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 such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

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 $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.

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 modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $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 $7,500 by 0.5. The result is $3,750.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.

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 specific circumstances.

8. Does the credit amount differ based on tax filing status?

No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files its taxes as “married filing separately” (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.

9. Are there any circumstances under which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?

In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.

10. I heard 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.

For example, if a qualified home buyer expected 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 15. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed). 

11. What is the difference between a tax credit and a tax deduction?

A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15% tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15% of $7,500), or lowered from $7,500 to $6,375.

12. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?

No. The tax credit cannot be combined with the MRB home buyer program.

13. I live in the District of Columbia. Can I claim both the D.C. first-time home buyer credit and this new credit?

No. You can claim only one.

14. I am not a U.S. citizen. Can I claim the tax credit? 

Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519 (www.irs.gov/pub/irs-pdf/p519.pdf).

15. Does the credit have to be paid back to the government? If so, what are the payback provisions?

Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.

16. Why must the money be repaid?

The intent of Congress was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices and will increase home sales. The repayment requirement reduces the impact on the U.S. Treasury and assumes that home buyers will benefit from stabilized and, eventually, rising future housing prices.

17. Because the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?

Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers more than $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.

18. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 as if the purchase occurred on Dec. 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

19. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?

Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

Comments (13)

Darrel Davis
Winter Garden, Florida - Winter Garden, FL
Southern Heritage Realty

124 views and 118 clicks, but nobody has replied to let me know this was usefull. With or without responces I hope that it has helped answer a few questions.

Jul 31, 2008 06:36 AM
Anonymous
Michael

Thanks for the information.  I found it well presented and usefull.

Aug 01, 2008 02:23 PM
#2
Anonymous
Robert Brown

I am purchasing a home and it has been 27 months since I sold ,ay last home is there any tax credit that I qualify for???

Aug 02, 2008 10:30 AM
#3
Darrel Davis
Winter Garden, Florida - Winter Garden, FL
Southern Heritage Realty

Robert: Under the current guidelines you are eligable only if you close around or after May or June of 2009. Anytime before that and you will not qualify as a "first time buyer". The criteria for a first time buyer is someone who has not owned a home in the last three years prior to purchasing another home. You should check the closing date on the sale of your home 27 months ago and determine what date you would need to close on to achieve the 3 year mark. I'd suggest consulting with your CPA.

Aug 02, 2008 04:47 PM
Anonymous
lewis

can i take the credit if i have been buying a house from a friend and now have got an offical mortgage from a bank?

Aug 13, 2008 09:30 AM
#5
Darrel Davis
Winter Garden, Florida - Winter Garden, FL
Southern Heritage Realty

"can i take the credit if i have been buying a house from a friend and now have got an offical mortgage from a bank?"

Lewis: You should be able to as long as you are just now taking title. What I mean by that is that you are probably paying him with a "lease purchase" and he has retained the deed and it hasnt been transfered to your name.

Aug 13, 2008 04:27 PM
Anonymous
LW

I divorced last year.  My name was 2nd to my ex-husband on the mortgage of a home we owned for 15 years.  When I went to the bank to get pre-approved for the loan on my new home, they said since I was divorced and buying the house on my own, I was considered a first time home buyer.  Would I qualify for the credit under the IRS rules?

Aug 18, 2008 04:39 AM
#7
Dee Dee
White Plains, NY
NY,NJ, CT Home Loan Expert

This is really great news for buyers in the current market, I hope that the realtors and loan officers out there are educating their clients regarding this $7500 tax credit. Great information and FAQ!

Aug 19, 2008 05:11 AM
Anonymous
DJ Maniace

What is the process to receive the credit?

Does the money come at the closing table?

Aug 28, 2008 02:52 AM
#9
Anonymous
Melody Holder

I am new to this concept, and I have told some of my home buyers about it, But after reading the blog I must go back to them and let them know that they do have to pay it back, My question is when does the pay back start? The folks I am working with could use the money for upgrades, but I need to make sure they understand the process.

Sep 28, 2008 12:14 PM
#10
Anonymous
Brian Johnson

Does anybody know if having owned a mobil home, not on land but in a park where pad rent was paid, would disqualify me from recieving the credit?

Any help, or suggestions on where I could go to get the answer would be greatly appreciated!

Sep 29, 2008 10:12 AM
#11
Cheryl Powell - The Powell Team
Southern Homes of The Carolinas - The Powell Team - Harrisburg, NC
Concord,Harrisburg & Charlotte NC Area Real Estate

Personally, I don't think that this will help the real estate market recover.  Besides the increased credit limit requirements needed to qualify for a loan, buyers must now have at least 3.5% downpayment (except for a few 100% programs still out there).  The $7500 can't be used as a downpayment since you don't get it until you get your tax refund next year AND it has to be paid back.  PLUS, the money is really just a loan since it must be paid back!

Sep 29, 2008 10:28 AM
Anonymous
D. Thompson

I just purchased a house under owner terms.  Can I use the tax credit?

Feb 27, 2009 12:42 PM
#13