Monday, February 2, 2009

$7500 Tax Credit for First-Time Homebuyer's!

Taking the First-Time Homebuyer Credit
Updated: 1/24/2009

Homebuyers could be 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 purchase a home on or after April 9, 2008 and before July 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.

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 example, if your income is $85,000, you could receive a credit worth no more than $3,750.
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.

For married couples, the credit starts to decrease at modified adjusted gross of $150,000 and disappears after $170,000.
When would I get the money from the credit?

You get the money only after you claim the credit on either your 2008 or 2009 tax return, NOT when escrow closes on the home.

However, you can speed up the process if you buy a home in 2009, prior to July 1. Instead of waiting until you file your taxes in 2010, you can after Dec. 31, 2008 treat the purchase as if it were completed in 2008. That means you can amend your 2008 return and get the credit in 2009.

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.

Here's some examples:

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 (sales price over $75,000, credit is $7500), 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


But if, for example, your tax liability was $10,000, but you had paid no withholding, then the credit would reduce the taxes you owe, as illustrated below.


Tax Liability
$10,000
Minus housing credit
- 7,500
Minus withholding
0
Taxes due
$2,500

How do I repay the credit?

You start repaying the credit in the second year after the tax year that the home was purchased.
So if you took the credit on your 2008 tax return, you 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, you either get $500 less on your refund each year, or you owe $500 more in taxes.

You might need to increase your withholding or make quarterly estimated payments to cover for the repayment and ensure that you don't get penalized for under-withholding.

What if circumstances change?

-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.

Other considerations
The credit is not available if:
-You buy your home from a close relatives, such as your spouse, parents, grandparent, child or grandchild.
-Your home financing comes from tax-exempt mortgage revenue bonds.
-You are, or were, eligible for the District of Columbia first-time homebuyer credit for any year.

Call me with any questions you have about this program!

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