Home Buyer Tax Credit

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If you’re like me, your head probably spins like a character out of a Tim Burton movie when the slight mention of the words “stimulus”, “package”, “tax”, and “credit” make their way through your external auditory canal.

First, there was the $15,000 Tax Credit for all home buyers approved by the Senate. The problem with that? It wasn’t final. Why? The Senate version of the bill was different than the version presented by the House, which means that the bill had to go to a conference committee consisting of members of both the House and the Senate in order to reconcile the differences between the two bills. What happened when they got together? They scrapped the $15,000 Tax Credit and opted for a smaller tax credit that applies to first time home buyers only.

The First Time Home Buyer Tax Credit, an $8,000 tax credit made effective when President Obama signed the American Recovery and Reinvestment Act into law on February 17, 2009, provides an incentive for first time home buyers to purchase a home this year. In turn, the credit serves as a mechanism to decrease the oversupply of homes currently for sale.

The credit is available only to first time home buyers who purchase a principal residence on or after January 1, 2009 and before December 1, 2009. Any home that is purchased for $80,000 or more qualifies for the full $8,000 tax credit. If the house costs less than $80,000, the credit will be 10% of the cost.

Ex: If an individual purchases a primary residence for $60,000 (very doable in this market), the credit would be $6,000.

How will they determine who is a first time homebuyer?

A person is considered a first time home buyer if he/she has not had any ownership interest in a home in the three (3) years previous to the day of the 2009 purchase.

What is considered a principal residence?

A principal residence is the home where an individual spends most of his/her time (generally more than 50% of the time). It is also defined as owner-occupied housing.

Is there an income restriction?

An income restriction based on the tax filing status that the purchaser claims when filing his/her income tax return is in place. Individuals filing a Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a joint return may have income of no more than $150,000.

So, how does this tax credit work?

The tax credit is applied to the total income tax bill once the total income tax owed by the purchaser has been computed. Every dollar of a tax credit reduces income taxes by a dollar.

In other words, say that before taking any credits on a tax return a person has a total tax liability of $10,000. The $8,000 tax credit would wipe out all but $2,000 of the tax due ($10,000 – $8,000).

How about if a person’s entire income tax liability for the year is less than the $8,000 tax credit?

This is where it starts to make sense. This tax credit is what is referred to as a refundable credit, meaning that if an eligible purchaser’s total tax liability is less than the $8,000 tax credit, the IRS would send the purchaser a check for the difference between the $8,000 credit amount and the amount of tax liability.

Let’s say the purchaser has a total tax liability of $5,000. Once the $8,000 tax credit is applied it not only erases his/her tax liability, it provides the purchaser with an asset in the form of a $3,000 check from Tio Sam.

Unlike the $7,500 tax credit enacted by Congress in 2008 which served more as an interest-free loan, the 2009 $8,000 tax credit does not have to be repaid.

Furthermore, eligible home buyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred in 2008. Thus, they have the option of claiming the $8,000 credit on their 2008 tax return due on April 15, 2009 (if they purchase between January 1, 2009 and April 15, 2009) or claiming the credit on their 2009 tax return due April 15, 2010.

Eligible purchasers who extend their 2008 income tax filing (until as late as October 15, 2009) can also treat a purchase between January 1, 2009 and the date of their extension deadline as a 2008 purchase. Thus, they too have the have the option of claiming the $8,000 credit on their 2008 tax return or claiming the credit on their 2009 tax return due April 15, 2010.

Anyone claiming the credit who decides to sell the property within 3 years of the date of purchase, will be required to pay back the full amount of any credit, including any refund received from it. The 3-year recapture rule is designed as an anti-flipping rule.

So, will this help jump-start the struggling real estate market? I don’t know. The fact that it only applies to first time home buyers and not all home buyers doesn’t offer any incentive to those who have the equity to sell and buy in today’s market (contrary to popular belief or what the media would have you believe, people like that still exist). However, this is definitely an upgrade to the 2008 $7,500 tax credit that has to be repaid.

For more information regarding the First Time Home Buyer Tax Credit click here or feel free to contact me at 305-491-7179 or SalgadoA@gmail.com.

Disclosure: Adrian Salgado is a realtor associate with dash – real estate company. He is not an accountant, CPA, tax attorney, or any other kind of tax professional. As a matter of fact, he hates accounting with a passion and believes that anyone with an accounting degree is really a masochist disguised as a numbers cruncher. Seek the advice of a masochist professional before making any decisions that may potentially cause the IRS to send Luca Brasi over to your newly purchased home.

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