Friday, March 19, 2010

2009 Home Buyer Tax Credit: First Time Homebuyer and Repeat Home Buyer

CPA Shares Little-Known Facts About the 2009 Home Buyer Tax Credit Extension

Like most government legislation, the Nov 6, 2009 homebuyer tax credit extension created more questions than answers. However, according to Doug Geissler, a certified public accountant, the Internal Revenue Service is literally writing the "refund rules" as they go along.
Unbeknown to homebuyers, real estate agents and the mortgage industry, the IRS is giving behind-the-scenes instructions (that are not available to the general public) to CPAs and tax advisors on how to file for the homebuyer tax credit after Nov. 6, 2009. It will be completely different than what you might have advised your clients previously-and your clients are not going to like these changes!

The first shocker?
  • Your clients cannot file a 1040 EZ to claim the tax credit. Nor can they file tax returns electronically if claiming the tax credit.Why no electronic filing or 1040 EZ forms? It's the first step in stopping fraudulent tax credit refunds. Believe it or not, the IRS never had a way to determine if a person owned a home-no auditing software in place-to determine if they previously claimed a "mortgage interest" deduction within a three-year time period. The IRS is building auditing software now to "catch" previous homeowners who are trying to claim a FTHB tax credit.
  • Secondly, the IRS now requires that the HUD-1 or closing statement be attached to the 5405 form (and that cannot be attached electronically). Here's the link to the 5405 Revised Form dated December 2009: http://www.irs.gov/pub/irs-pdf/f5405.pdf
And to give them time to audit the document, the IRS is telling tax advisors to expect an average of a 16-week turn around time-which means that it could either be the refund or a request for additional documentation. Mr. Geissler says that one of his clients recently received an IRS notice, requesting a letter from a landlord, a copy of a driver's license and the closing statement on an amended tax return where the client was claiming the FTHB tax credit. Yes, the new law allows them to ask for additional info on amended returns.

So, what means, that if your clients is expecting an income tax refund and a homebuyer tax credit refund, both refunds could be held up for several months.

We all know what adjusted gross income is, right? But did you know that there are over 20 different "modified adjusted gross income" interpretations for different tax forms and credit tax claims?

In regard to the homebuyer tax credit, the simple explanation is that is Line 38 on the 1040 form (remember, no 1040EZ to claim this tax credit). However, if IRS Form 2555 (Foreign Earned Income) or IRS Form 4563 (Exclusion of Income from Bona Fide Resident of American Samoa) is attached, this income has to be added to line 38 to determine if the clients meet the maximum income limits of $125,000 or $225,000. While this might not apply to very many clients, it's something you can counsel your client about if they claim foreign income to qualify for a loan.

Monday, March 15, 2010

Rental of Current Home and purchase another

I wanted to give some additional info on rental of current home if the borrower was going to go with an FHA loan for their next loan and additionally for conventional financing, IF the 30% equity cannot be documented:

FHA: Cannot use any rental income unless it has been rented for over 12 months and is on the tax returns. (home being vacated cannot be an FHA loan and get a new FHA loan)

CON: Need to show proof of 30% equity with AVM or exterior only appraisal, proof security deposit has been deposited and lease agreement. If the 30% equity CAN NOT be documented- you need to have 6 months PITI for BOTH properties. 75% of the rental amount can be used.

Marty

Rental of current home

I wanted to give some additional info on rental of current home if the borrower was going to go with an FHA loan for their next loan and additionally for conventional financing, IF the 30% equity cannot be documented:

FHA: Cannot use any rental income unless it has been rented for over 12 months and is on the tax returns. (home being vacated cannot be an FHA loan and get a new FHA loan)

CON: Need to show proof of 30% equity with AVM or exterior only appraisal, proof security deposit has been deposited and lease agreement. If the 30% equity CAN NOT be documented- you need to have 6 months PITI for BOTH properties. 75% of the rental amount can be used.

Marty

Rental of present home and purchase another (future home to be owner occupied)

If a buyer would like to rent their present home and purchase a new home, what is the documentation requirement to make this possible?

  1. Buyer must have at least 6 months of piti (full payments) for the home to be a rental on deposit in checking or savings AFTER closing of the purchase of the next home
  2. Rental home must have at least 30% net equity (from an appraisal or County tax notification)
  3. Show that the Security Deposit and 1st months rental/lease payment has been received (verification that the amount has been deposited in their checking or savings account).
  4. The buyer cannot have an FHA loan on the rental and get a future FHA loan (only 1 FHA owner occupied loan is allowed at a time).

Call me if you have any other questions.

FHA holds firm on 3.50% minimum down payment

This past Thursday (March 11, 2010), FHA Commissioner David Stevens testified before Congress that an increase in the minimum down payment from 3.50% to 5% would result in 300,000 fewer buyers able to use FHA financing. This translates into a 40% drop in the Housing Market. It looks like FHA is going to stand firm on their minimum down payment at 3.50% and says the increase in the upfront mortgage insurance premium in 3 weeks from 1.75% to 2.25% should be sufficient to correct the shortfall in revenue and keep FHA solvent.

In other news last Thursday, David Stevens said that a .25% to .75% increase in mortgage rates is an acceptable sign of health in the economy. Wow, hang onto your hats if this happens! This of course is not the news that we want to be hearing and I could see that if there is a chill in the housing market because of the increases in rates, we will see the Government again participate in the Mortgage Back Security (MBS) program. For now, this is an excellent time for taking advantage of tax credits, low rates and depressed home prices.