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Taking the First-Time Homebuyer Credit

Updated for Tax Year 2011


OVERVIEW

Note: The content of this article applies only to taxes prepared for 2009 and 2010. It is included here for reference only. It's a new and improved version of the 2008 First-Time Homebuyer Credit that should help make buying a home more affordable for many buyers. The credit has been increased to $8,000 and doesn't have to be repaid. For purchases after November 6, 2009, a $6,500 credit is also available to qualifying repeat buyers.


Buy a first home and earn a tax credit of up to $8,000. This provision of the 2009 American Recovery and Reinvestment Act, the “stimulus” bill, can put $8,000 in your pocket to help pay for your new digs. Better yet, under legislation signed into law in November 2009, the credit has been expanded and made easier to qualify for.

As a result, if you would otherwise get an average-size refund when you file your 2010 tax return—about $2,800—qualifying to claim this new credit would boost your refund to more than $10,000. Even better, unlike the $7,500 tax credit available for Americans who bought their first home in 2008, this new version does not have to be repaid.

New rules now apply

For 2010 buyers, the credit really is a credit: It doesn’t have to be repaid as it did in previous years. (One exception: You will have to pay back the credit if you sell the house within three years of buying it.)

As amended in November 2009, the First-Time Homebuyer Credit was extended to purchases in contract by April 30, 2010, and closed by June 30, 2010. The closing date was subsequently extended to September 30, 2010. For members of the armed forces serving at least 90 days outside the United States, the credit can be used until June 30, 2011.

For purchases made after November 6, 2009, the credit is not available for any home costing more than $800,000. The income limits for eligibility have also been expanded. The credit does not start to phase out until Modified Adjusted Gross Income exceeds $125,000 for single taxpayers and $225,000 for married couples filing jointly.

In addition, for purchases made after November 6, 2009, the credit can be claimed by homeowners purchasing a new principal residence as long as they have lived in their current home for at least five consecutive years out of the last eight years. For repeat purchasers, the credit is capped at $6,500.

When does the 2008 version of the credit have to be repaid?

The First-time Homebuyer Credit has evolved since it’s original version, created as part of the Housing and Recovery Act of 2008. Initially, the credit applied to homes purchased after April 8, 2008, and before Jan. 1, 2009. It was a $7,500 “credit” that required you to pay back the $7,500 credit over 15 years, beginning with your 2010 tax return.

If you claimed and received the one-time homebuyer credit on your income tax return for 2008, you must repay the credit, beginning with your 2010 tax return.

If you received the full $7,500 credit, your annual payment is $500 per year. Married couples are each responsible for repaying $250 per year, for a total of $500 annually.

If your credit was less than $7,500, your annual payment is 6.66% of the total credit.

If you purchased your home on or after January 1, 2009 and on or before April 30, 2010, the credit does not need to be repaid unless you sell, or stop using the home as your primary residence, within three years or purchase.

Questions about your repayment amount?  The IRS now offers the First Time HomeBuyer Credit Account Look-up, a handy tool that allows you to look up account information, such as the total amount of your credit or your repayment amount. To access the tool you'll need to provide your Social Security number, date of birth and address.

If you want to amend your tax return to claim the credit

Under both the old and the new versions of the law, you can treat the purchase as having taken place on December 31 of the prior year if you want to claim the credit against that year’s taxes. You are also permitted to file an amended return for the prior year, if you’ve already filed, rather than waiting to file your 2010 tax return in 2011. Congress has also provided that taxpayers won’t have to repay 2009 credits they took on their 2008 tax returns.

Getting your money

Most qualifying taxpayers will claim the credit ($8,000 for purchases through April 30, 2010) on their tax returns on Form 5405: “First-Time Homebuyer Credit and Repayment of the Credit.”

In addition to filing Form 5405 with their 2010 tax returns, eligible homebuyers will also need to submit documents supporting their eligibility to claim the credit.

Because of the documentation requirements, if you claim this credit you must file a paper return and cannot file electronically. You can still use software like TurboTax to prepare your return, but you will need to print your return and snail mail it to the IRS with copies of the required documentation. In fact, on its homebuyer credit Q&A page, the IRS “urges you to use tax-preparation software to fill out your return because the software helps to avoid needless mistakes as the return is prepared.”

Normally, it takes about four to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. For homebuyers filing early, the IRS expects the first refunds based on the homebuyer credit will be issued toward the end of March.

If you owe more tax with your return than your credit amount, it will instantly reduce your tax bill dollar-for-dollar. If you owe less than your first-time homebuyer credit, you’ll receive the balance as a tax refund.

Getting your money even faster, with government help

Most people who use 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 in May 2009 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% 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 Web site.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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