- How to Qualify for the First-Time Homebuyer Credit
How to Qualify for the First-Time Homebuyer Credit
How the 2008 credit works
Some 2008 homebuyers are eligible for a tax break, essentially an interest-free loan worth as much as $7,500, under The Housing Assistance Tax Act of 2008.
- Known as the first-time homebuyer credit, the tax break is available if you purchased a home on or after April 9, 2008 and before Jan.1, 2009, and meet certain income and other requirements.
- The credit is equal to 10 percent of the home purchase price, up to a limit of $7,500.
- Unlike other tax credits, this one must be paid back to the government, over a 15-year period.
Much improved benefits for 2009 buyers
Under the American Recovery and Reinvestment Act, signed into law Feb. 17, 2009, the first-time homebuyer credit offers buyers a much better tax break.
And there's another big plus: Taxpayers who purchase in 2009 can claim the credit when they file their 2008 tax returns, or amend their 2008 tax returns, assuming they meet other qualifications. That way, they can get the credit right after they make their purchase, rather than waiting until their file their 2009 taxes in 2010.
The new law increases the $7,500 first-time homebuyer credit to $8,000 for primary residences purchased between Jan. 1, 2009 and Nov. 30, 2009, and eliminates the requirement that the credit be repaid, as long as the house isn’t sold within three years.
The credit is equal to 10 percent of the home purchase price, up to a limit of $8,000. Those who qualify for the credit will have their refunds increased or their taxes reduced by up to $8,000, on a dollar-for-dollar basis.
Taxpayers who qualify for the credit for a home purchased in 2009, and who filed their 2008 returns before the credit was increased, can amend their 2008 return to receive the additional $500.
Qualified buyers who purchase a home in 2009 after filing their 2008 taxes can amend to get their credit quickly. To learn how, read First-Time Homebuyer Credit: How to Amend 2008 Return for 2009 Purchase.
A special, upfront benefit for some buyers in 2009
Most people who qualify for the First-Time Homebuyer Credit will not receive it until after they buy their homes, and claim the credit on their tax returns.
However, some buyers can get all or part of their credit up front, to pay for closing costs and all or part of their down payments, thanks to federal and state housing programs:
- The federal department of Housing and Urban Development (HUD) announced May 29 that homebuyers using Federal Housing Administration (FHA) loans can apply the credit to their down payments and closing costs. Buyers must first make a 3.5 percent minimum down payment to qualify for the loan, but can immediately use the credit for additional down payment or other closing costs.
- In some states, state Housing Finance Agencies and certain non-profit organizations will allow qualified homebuyers to apply the credit to their down payments (without the 3.5 percent buyer's contribution), using financing provided by the agencies or the non-profits.
For more information, visit the HUD website.
Do 2008 homebuyers still have to repay their credits?
Unfortunately, for those who purchased homes in the eligible 2008 period, the credit remains at $7,500 and MUST still be repaid.
The details below apply to both the 2008 and 2009 credits, except where indicated.
Who is considered a "first-time" homebuyer?
Any taxpayer who has never owned a home as a principal residence.
However, you could qualify if you’ve owned a home before, but not as your principal residence during the three years prior to the purchase.
Married couples cannot qualify for the credit unless both spouses meet the three-year rule.
What qualifies as a principal residence?
Your principal residence is where you live for most of the year. That can be a house, a condo, co-op, house trailer or houseboat, within the United States. Vacation and rental homes are not eligible.
What are the income limitations?
For single taxpayers, the credit decreases as modified adjusted gross income rises above $75,000, and it disappears altogether above $95,000.
For married couples, the credit starts to decrease at modified adjusted gross of $150,000 and disappears after $170,000.
Modified adjusted gross income is your adjusted gross income, or AGI (your gross income minus certain deductions such as IRAs and alimony) with tax-free foreign income counted.
When would I get the money from the credit?
Most buyers will get the money only after they claim the credit on their 2008 or 2009 tax returns. And they can claim the credit only after they have actually purchased the home and closed escrow.
Some buyers, however, will get their money before they purchase a home, under special federal and state housing programs. (See above)
What is considered the "purchase price"?
The purchase price is generally your down payment, if any, plus your mortgage. A mortgage can be a first or second mortgage or notes you gave the seller in payment.
How does the credit affect the taxes I owe and the refund I get?
The credit reduces your tax liability, that is, the amount of taxes you are required to pay. Depending on your tax withholdings, you could get a bigger refund or owe less in taxes when you file.
If, for example, your taxes owed for one year are $6,000, you’ve had $4,000 withheld from your wages, and you buy a home worth $100,000 in 2008, the housing credit would entitle you to a refund, as shown below.
| Tax liability | $6,000 |
| Minus housing credit | -7,500 |
| Minus withholding | -4,000 |
| Refund | $5,500 |
| Tax Liability | $10,000 |
| Minus housing credit | - 7,500 |
| Minus withholding | 0 |
| Taxes due | $2,500 |
For the 2008 credit, how do I repay the credit?
If you bought your home in 2008, and claim the credit, you start repaying it in the second year after the tax year that the home was purchased.
So you would begin repayment when you file your 2010 tax return. Your payments are set at $500 per year for 15 years.
They are “paid” as part of your tax liability. Depending on your tax situation, each year your refund is reduced by as much as $500 a year, or you owe as much as $500 in taxes.
You might need to increase your withholding or make quarterly estimated payments to cover the repayment and ensure that you don't get penalized for under-withholding.
What if my circumstances change?
For homes purchased in 2008:
- If you sell the house before the end of 15 years, you will have to pay the balance remaining on the credit on the tax return for the year the house was sold.
- If you no longer use the home as your principal residence (say you rent it out), you pay the remaining balance on the tax return for the year the use changed.
- If you die before the 15 years, the balance does not need to be repaid.
- If you get a divorce and the home is transferred to your spouse, your spouse will be responsible for future payments.
For homes purchased in 2009:
- If you sell the home or otherwise don't use it as your main home within the first three years, you must repay the credit. If you live in it as your main home for more than three years, you don't need to repay the credit.
What if two, unmarried people buy a home together?
If two unmarried people buy a house together, how do they determine how much each may take of the credit?
The two people decide how to allocate it, as long as the total amount isn't greater than $7,500 for a 2008 purchase or $8,000 for a 2009 purchase, or 10% of the purchase price of the home.
