First Time Home Buyer Tax Credit

(The Housing and Economic Recovery Act of 2008)

By Mikey and Steven Hall

DISCLAIMER

This article is intended to be a general discussion only and is not intended to, and does not give, legal advice or render legal opinions. The references contained herein were dated the moment they were written down. All sources listed must be confirmed by means of the opinions of the appropriate licensed professionals and/or recognized authoritative sources and any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed.

The "Housing and Economic Recovery Act of 2008," (H.R. 3221) passed the House on July 23, 2008 and the Senate on July 26, 2008. One of the provisions of this bill authorizes a $7,500 tax credit for qualified first-time buyer who bought their home on or after April 9, 2008 and before July 1, 2009.

[February 2009 Update: The first-time homebuyer tax credit will be modified by the American Recovery and Reinvestment Act. See endnotes regarding the revised credit at the end of the article.]

The law defines a "first-time home buyer" as a buyer who has not owned a principal residence in the last three years before the purchase. If you are married, the law looks at both the husband and wife and if either has owned a home within the previous three years both are disqualified. Ownership of vacation homes or rentals do not count.

Individuals qualifying for the tax credit simply claim the tax credit on their federal tax return. Although no pre-approval is required it would be wise to have your tax consultant confirm that you qualify under the income limits and the first-time buyer tests.

To qualify for the credit, a home must be used as a primary residence which can include attached (condominiums) and detached homes, as well as manufactured homes (mobile homes) and houseboats.

Homes which are constructed by the homeowner are considered to have been purchased on the day the owner moves in. This means the date of occupancy must be after April 9, 2008 and before July 1, 2009. If the home is purchased from a builder/developer the purchase date is the date escrow closes (settlement date).

"Modified adjusted gross income," or MAGI is defined by the IRS. To determine their MAGI, a taxpayer must first determine their "adjusted gross income," or AGI, then add to the AGI certain amounts specified by the IRS.

The phase-out to qualify for the tax credit is a MAGI of $150,000 for married couples and $75,000 for single individuals. If the taxpayer's MAGI exceeds the phase-out, then the credit must be reduced according to a set formula.

The tax credit is refundable meaning that it can be claimed even if there is little or no income federal tax liability to offset. This might mean that the taxpayer will receive a tax refund as a result of the tax credit.

The tax credit must be repaid over 15 years (equal payments) or when the home is sold if there is sufficient capital in the home. Payments do not have to be made until two years after the credit is claimed. If the homeowner makes a couple of payments then sells the home then the balance must be repaid from the proceeds.

Since the tax credit is interest free it operates just like an interest free loan.

Numerous other details contained in the bill have not been covered in this article. You should confirm your own situation with your tax consultant.

Contact us if you are interested in looking at available property in South Orange County. mailto:AskMikeyHall@gmail.com

The American Recovery and Reinvestment Act modifies the first-time homebuyer tax credit in a number of ways including the following:

1. The maximum credit amount will be increased to $8000 and will be effective for purchases on or after January 1, 2009 and before December 1, 2009.

2. Purchasers who use revenue bond financing can use the credit.

3. The definition of first-time buyer remains unchanged.

4. There will be no repayment for purchases on or after January 1, 2009 and before December 1, 2009.

5. If the home is sold within three years of the purchase, the entire amount of the credit is recaptured on the sale. This applies only to home purchased in 2009 (not a retroactive).

6. The program terminates December 1, 2009.

7. All revisions are effective as of January 1, 2009.

The details of the modifications should be reviewed with your tax consultant.

 The Home Buyer Tax Credit is set to expire this year and in order to qualify the home buyer had to (1) have their property under contract by April 30, 2010 and (2) close escrow by June 30, 2010.  As of this update the closing deadline has been extended to September, however this extension only helps those properties which have satisfied the contract deadline.

It should be noted that as we approached the April 30 contract deadline the sales of existing homes experienced 22.8% increase between March and April, as was reported by the National Association of Realtors.  When the contract closing deadline passed there was a slow down in the sales of existing homes that coincided with the expiration of the tax credit.  This slow down is strong evidence of the beneficial effect the Home Buyer Tax Credit had on the market.