The American Recovery and Reinvestment Act of 2009 was recently enacted as a means of stimulating the economy. The most noteworthy real estate aspect of the Recovery Act is a refundable tax credit of up to $8,000 for first-time homebuyers. This article will summarize the main qualifications and limitations for taking advantage of this tax credit.
Timing. In order to qualify for this tax credit, a first-time homebuyer must purchase a principal residence between January 1, 2009 and November 30, 2009. A home is “purchased” when the title is transferred, so closing must occur on or before November 30th to be eligible for the credit. Similarly, if you are building a home, you must move in by November 30th.
First-time homebuyer. The tax credit is available only to first-time homebuyers. However, a “first-time homebuyer” is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. All U.S. citizens who file a tax return, as well as resident aliens with an ITIN, are eligible for the credit.
Amount of Credit. The actual amount of the tax credit is 10% of the purchase price of the residence, capped at $8,000. So if the purchase price of the house is $70,000, the credit is $7,000, if the purchase price is $80,000, the credit is $8,000, and if the purchase price is $90,000, the credit is still $8,000.
Income Limitations. Individuals filing as single or head of household can claim the full credit if their adjusted gross income (AGI) is $75,000 or less. For married couples filing jointly, the amount is doubled to $150,000. The credit phases out between $75,000 – $95,000 for singles, and between $150,000 – $170,000 for married couples filing jointly. For example, a married couple earning $165,000 would only receive a partial tax credit of $2,000.
Refundable Tax Credit. A tax credit reduces the income tax due on a dollar for dollar basis. So if you owe $8,000 of income tax, and you have an $8,000 tax credit, the credit cancels out the tax owed. Now let’s say you owe $6,000 in taxes, had $7,000 of withholdings, and qualified for an $8,000 tax credit. Under this example, the $7,000 withholdings and the $8,000 tax credit are combined to equal $15,000, less the tax liability of $6,000, equals a tax refund of $9,000. Eligible purchasers can claim the tax credit by simply attaching IRS Form 5405 to their 1040 tax return.
Timing of tax credit. Although a qualifying purchase must occur in 2009 between January 1st and November 30th, you have the option of claiming your tax credit on your 2008 tax return. Even if you have already filed your 2008 tax return and subsequently purchased a home, you can file an amended tax return by using IRS Form 1040X. If you have not yet filed your 2008 tax return and plan to purchase a home, another option would be to file for an extension. The final alternative is to simply take the credit on your 2009 tax return. Under this alternative, you can modify your income tax withholdings or adjust your quarterly estimated tax, as applicable, to take into account the tax credit you will be claiming.
Recapture. Another limitation is that any resale of the residence within three years of date of purchase will trigger a requirement that the entire credit be repaid to the government. This is essentially an “anti-flipping” safeguard.
2008 verses 2009. The 2009 first-time homebuyer tax credit is actually a major improvement over a first-time homebuyer tax credit introduced in 2008. The 2008 version ran from April 9, 2008 through December 31, 2008 and included a $7,500 maximum tax credit. The 2008 tax credit, however, had to be repaid over 15 years (or sooner if the house was sold), so it was basically an interest-free loan. The 2009 version increases the incentive to take advantage of the tax credit by eliminating the recapture provision and by increasing the maximum credit to $8,000.
This stimulus measure essentially acts as a discount on the purchase price of a home, thereby encouraging first-time homebuyers to purchase a principal residence even in an uncertain market. Additionally, if the seller was waiting to sell before buying another home, this domino effect could help to jumpstart the real estate market.