|
| |
Move-Up/Repeat Home Buyer Tax Credit
The Worker, Homeownership, and Business Assistance Act of 2009 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, we
strongly encourage you to consult a qualified tax advisor or legal professional
about your unique situation.
- 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.
- 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 person who has owned and resided in the same 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.
- 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.
- 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.
- 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.
- 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.
- 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 $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 modified
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 specific
circumstances.
- How is this home buyer tax credit different from the tax credit
that Congress enacted in July of 2008? 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.
- 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, 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.
- 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 definition 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.
- 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.
For example, if a qualified home buyer expected, notwithstanding the tax
credit, 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
$6,500 home buyer tax credit. As a result, the taxpayer would receive a check
for $5,500 ($6,500 minus the $1,000 owed).
- Instead of buying a new home from a home builder, 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 that
is 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 after November 6, 2009 and on or before
April 30, 2010 (or by June 30, 2010, provided a binding sales contract was 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. Be sure
to check with a tax advisor in cases where a HUD-1 form is not used at
settlement to be sure you have sufficient documentation to attach to
IRS Form
5405.
- Can I claim the tax credit if I finance the purchase of my home
under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program.
- I am not a U.S. citizen. Can I claim the tax credit?
Perhaps. Anyone who is not a nonresident alien (as defined by the IRS) and who
has owned and resided in a principal residence in the United States for at
least five consecutive years of the eight years prior to the purchase date can
claim the tax credit if they meet the income limits. For married taxpayers,
the law tests the homeownership history of both the home buyer and his/her
spouse. The IRS provides a definition of “nonresident alien” in IRS
Publication 519.
- 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 $6,500 in income taxes and who receives an
$6,500 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 percent tax bracket and
owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the
taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or
lowered from $6,500 to $5,525.
- Is there a way for a home buyer to access the money allocable to
the credit sooner than waiting to file their 2009 or 2010 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are
permitted to reduce their income tax withholding. Reducing tax withholding (up
to the amount of the credit) will enable the buyer to accumulate cash by
raising his/her take home pay. This money can then be applied to the
downpayment.
Buyers should adjust the withholding amount on their W-4 via their employer or
through their quarterly estimated tax payment. IRS Publication 919 contains
rules and guidelines for income tax withholding. Prospective home buyers
should note that if income tax withholding is reduced and the tax credit
qualified purchase does not occur, then the individual would be liable for
repayment to the IRS of income tax and possible interest charges and
penalties.
In addition, rule changes made as part of the economic stimulus legislation
allow home buyers to claim the tax credit and participate in a program
financed by tax-exempt bonds. As a result, some state housing finance agencies
have introduced programs that provide short-term second mortgage loans that
may be used to fund a downpayment. Prospective home buyers should check with
their state housing finance agency to see if such a program is available in
their community. To date, 18 state agencies have announced tax credit
assistance programs, and more are expected to follow suit. The National
Council of State Housing Agencies (NCSHA) has compiled a list of such
programs.
- HUD allows “monetization” of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their
anticipated tax credit toward their home purchase immediately rather than
waiting until they file their 2009 or 2010 income taxes to receive a refund.
These funds may be used for certain downpayment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders
are allowed to give home buyers short-term loans. The guidelines also allow
government agencies, such as state housing finance agencies, to facilitate
home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax
credit loans, which home buyers may use to satisfy the FHA 3.5 percent
downpayment requirement.
In addition, approved FHA lenders can purchase a home buyer’s anticipated tax
credit to pay closing costs and downpayment costs above the 3.5 percent
downpayment that is required for FHA-insured homes.
- If I’m qualified for the tax credit and buy a 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 home
purchases 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 income
limit (MAGI) applies and the election accelerates when the credit can be
claimed. A benefit of this election is that a home buyer in 2009 or 2010 will
know their prior year MAGI with certainty, thereby helping the buyer know
whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return,
but who have already submitted their tax return to the IRS, may file an
amended return claiming the tax credit using Form 1040X. You should consult
with a tax professional to determine how to arrange this.
- 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 phaseout would reduce your home buyer tax credit
amount in the present year and a larger credit would be available using the
prior year MAGI amounts, then you can choose the year that yields the largest
credit amount.
JRA Builders is providing the information on this web site for
general guidance only. The information on this site does not constitute the
provision of legal advice, tax advice, accounting services, investment advice,
or professional consulting of any kind nor should it be construed as such. The
information provided herein should not be used as a substitute for consultation
with professional tax, accounting, legal, or other competent advisers. Before
making any decision or taking any action on this information, you should consult
a qualified professional adviser to whom you have provided all of the facts
applicable to your particular situation or question. None of the tax information
on this web site is intended to be used nor can it be used by any taxpayer, for
the purpose of avoiding penalties that may be imposed on the taxpayer. The
information is provided "as is," with no assurance or guarantee of completeness,
accuracy, or timeliness of the information, and without warranty of any kind,
express or implied, including but not limited to warranties of performance,
merchantability, and fitness for a particular purpose.
|
J.R.A. Builders 
