Check Out the First-Time Homebuyer Tax Credit

If planning to buy in the next 10 months, take advantage of fed’s latest effort

By Marcie Geffner, bankrate.com | Published: 10/28/2008

If you’re planning to buy a home in the next 10 months, you may be eager to take advantage of the federal government’s latest effort to jumpstart the nation’s moribund housing markets: a tax credit of up to $7,500 for certain homebuyers. The credit may appear to be an attractive opportunity, but you should be sure you read the fine print before you elect to claim it on your federal tax return.

Here’s a summary of the rules:

     

  • The tax credit is not a deduction, but rather a true credit in the sense that your federal income tax liability will be reduced dollar-for-dollar up to the amount of the credit you’re entitled to take. 

     

  • The tax credit is repayable to the federal government. The total credit is divided into small bites of 6.67 percent, each of which is due annually for 15 years. That means if you claimed the maximum credit of $7,500, you’d have an additional tax liability of $502.50 each year for 15 years. No interest is charged. 

     

  • If you sell your home before the 15 years are up, the remainder of the credit that you haven’t yet repaid will become due. If you sell your home at a loss, the government will write off the balance of the credit that you still owe. 

     

  • The credit also will be written off if you die before it’s repaid. Special rules apply to transfers of property between spouses or incident to divorce; or if the home is subject to “involuntary conversion” such as being destroyed by a natural disaster; or is seized by a government authority though the exercise of eminent domain. 

     

  • The tax credit is restricted to “first-time homebuyers,” but the definition includes anyone who didn’t have an ownership interest in a principal residence during the prior three years. If you’re married, both you and your spouse must fit that definition. An ownership interest in an investment property or vacation home is not a disqualification. 

     

  • The tax credit may be taken only for the purchase of a principal residence, which means a home where you plan to live most of the time. The home may be a detached house, condominium, townhouse, manufactured (aka mobile) home or houseboat. It must be located in the United States. A home purchased from a “related party” (e.g., a parent or sibling) is not eligible. 

     

  • Your modified adjusted gross income, or MAGI, on your federal tax return must be less than $75,000 if you’re single or a married head of household, or $150,000 if you’re married and filing a joint tax return with your spouse. MAGI is a technical term that’s defined by the IRS, so you should consult a tax professional if you’re not certain as to whether you meet this test. 

     

  • If you’re single or a married head of household and your MAGI is more than $75,000, but less than $95,000, you may get a partial credit, subject to a complicated formula. The same is true if you’re married, filing jointly, and your MAGI is more than $150,000, but less than $170,000. If your MAGI is more than those limits, you’re not eligible. 

     

  • Technically, the credit is equal to 10 percent of the purchase price of the home, up to a maximum of $7,500. Thus, if the home is worth less than $75,000, the maximum credit is 10 percent of the price, and if the home is worth $75,000 or more, the maximum credit is $7,500. Married couples who file separate tax returns can claim half the credit on each return. 

     

  • The home must be purchased after April 9, 2008, but before July 1, 2009. Since the law was enacted July 30, 2008, part of that timeframe is retroactive. That means if you already bought a home after April 9, 2008, but before July 30, 2008, you can still take the credit. 

     

  • If you buy a home in the first half of 2009, you can elect to claim the credit on your 2008 tax return. That way, you’ll receive the money sooner, but the payback schedule will begin sooner as well. Tip: If your MAGI is over the limit for the full credit in either 2008 or 2009, you can claim the credit in the other year to maximize your benefit. 

     

  • The credit cannot be used with mortgage-revenue bond financing or the Washington, D.C., first-time homebuyer tax credit. 

Distributed by Scripps Howard News Service, http://www.scrippsnews.com