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The Worker, Homeownership and Business Assistance Act of 2009 has
established a tax credit of up to $6,500 for qualified move-up/repeat home
buyers (existing home owners) purchasing a principal residence after
November 6, 2009 and on or before April 30, 2010 (or purchased by June 30,
2010 with a binding sales contract signed by April 30, 2010).
The following questions and
answers provide basic information about the tax credit. If you have more
specific questions, we strongly encourage you to consult a qualified tax
advisor or legal professional about your unique situation.
Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat
home buyers purchasing any kind of home are eligible to claim this credit.
What is the definition of a move-up or repeat home buyer?
The law defines tax credit
qualified move-up home buyer ("long-time resident") as a home owner who has
owned and resided in a home for at least five consecutive years of the eight
years prior to the purchase date. For married taxpayers, the law tests the
homeownership history of both the home buyer and his/her spouse.
How is the amount of the tax credit determined?
The tax credit is equal to
10 percent of the home's purchase price up to a maximum of $6,500. Purchases
of homes priced above $800,000 are not eligible for the tax credit.
Are there any income limits for claiming the tax credit?
Yes. The income limit for
single taxpayers is $125,000; the limit is $225,000 for married taxpayers
filing a joint return. The tax credit amount is reduced for buyers with a
modified adjusted gross income (MAGI) above those limits. The phase-out
range for the tax credit program is equal to $20,000. That is, the tax
credit amount is reduced to zero for taxpayers with MAGI of more than
$145,000 (single) or $245,000 (married) and is reduced proportionally for
taxpayers with MAGIs between these amounts.
How is this home buyer tax credit different from the tax credit that
Congress enacted in July 2008?
How is this different than
the rules established in early 2009?
The previous tax credits applied only to first-time home buyers and were for
different amounts of money.
How do I claim the tax credit? Do I need to complete a form or
application?
You claim the tax credit on
your federal income tax return. Specifically, home buyers should complete
IRS Form 5405 to determine their tax credit amount, and then claim this
amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of
the 1040 income tax form for 2008 returns).
No other applications are required, and no pre-approval is necessary.
However, you will want to be sure that you qualify for the credit under the
income limits and repeat home buyer tests. Note that you cannot claim the
credit on Form 5405 for an intended purchase for some future date; it must
be a completed purchase. Home buyers must attach a copy of their HUD-1
settlement form (closing statement) to Form 5405 as proof of the completed
home purchase.
What types of homes will qualify for the tax credit?
Any home that will be used
as a principal residence will qualify for the credit, provided the home is
purchased for a price less than or equal to $800,000. This includes
single-family detached homes, attached homes like townhouses and
condominiums, manufactured homes (also known as mobile homes) and
houseboats. The definition of principal residence is identical to the one
used to determine whether you may qualify for the $250,000/$500,000 capital
gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among other
family members, your ancestors (parents, grandparents, etc.), your lineal
descendants (children, grandchildren, etc.) or your spouse or from your
spouse's family members. Please consult with your tax advisor for more
information. Also see
IRS Form 5405.
I read that the tax credit is "refundable." What does that mean?
The fact that the credit is
refundable means that the home buyer credit can be claimed even if the
taxpayer has little or no federal income tax liability to offset. Typically
this involves the government sending the taxpayer a check for a portion or
even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax
credit, federal income tax liability of $5,000 and had tax withholding of
$4,000 for the year, then without the tax credit the taxpayer would owe the
IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the
$6,500 home buyer tax credit. As a result, the taxpayer would receive a
check for $5,500 ($6,500 minus the $1,000 owed).
Can I claim the tax credit if I finance the purchase of my home under a
mortgage revenue bond (MRB) program?
Yes. The tax credit can be
combined with an MRB home buyer program.
Is there a way for a home buyer to access the money allocable to the
credit sooner than waiting to file their 2009 or 2010 tax return?
Yes. Prospective home
buyers who believe they qualify for the tax credit are permitted to reduce
their income tax withholding. Reducing tax withholding (up to the amount of
the credit) will enable the buyer to accumulate cash by raising his/her take
home pay. This money can then be applied to the down payment.
Buyers should adjust the withholding amount on their W-4 via their employer
or through their quarterly estimated tax payment. IRS Publication 919
contains rules and guidelines for income tax withholding. Prospective home
buyers should note that if income tax withholding is reduced and the tax
credit qualified purchase does not occur, then the individual would be
liable for repayment to the IRS of income tax and possible interest charges
and penalties.
In addition, rule changes made as part of the economic stimulus legislation
allow home buyers to claim the tax credit and participate in a program
financed by tax-exempt bonds. As a result, some state housing finance
agencies have introduced programs that provide short-term second mortgage
loans that may be used to fund a down payment. Prospective home buyers
should check with their state housing finance agency to see if such a
program is available in their community. To date, 18 state agencies have
announced tax credit assistance programs, and more are expected to follow
suit. The National Council of State Housing Agencies (NCSHA) has compiled a
list of such programs, which can be found here.
HUD allows "monetization" of the tax credit. What does that mean?
It means that HUD will
allow buyers using FHA-insured mortgages to apply their anticipated tax
credit toward their home purchase immediately rather than waiting until they
file their 2009 or 2010 income taxes to receive a refund. These funds may be
used for certain down payment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved lenders
are allowed to give home buyers short-term loans. The guidelines also allow
government agencies, such as state housing finance agencies, to facilitate
home sales by providing longer term loans secured by second mortgages.
Housing finance agencies and other government entities may also issue tax
credit loans, which home buyers may use to satisfy the FHA 3.5 percent down
payment requirement.
In addition, approved FHA lenders can purchase a home buyer's anticipated
tax credit to pay closing costs and down payment costs above the 3.5% down
payment that is required for FHA-insured homes.
If I'm qualified for the tax credit and buy a home in 2009 (or 2010), can
I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows
taxpayers to choose ("elect") to treat qualified home purchases in 2009 (0r
2010) as if the purchase occurred on December 31, 2008 (or if in 2010,
December 31, 2009). This means that the previous year's income limit (MAGI)
applies and the election accelerates when the credit can be claimed. A
benefit of this election is that a home buyer in 2009 or 2010 will know
their prior year MAGI with certainty, thereby helping the buyer know whether
the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax return,
but who have already submitted their tax return to the IRS, may file an
amended return claiming the tax credit using Form 1040X. You should consult
with a tax professional to determine how to arrange this.
Learn More
Further information can be
found at
www.federalhousingtaxcredit.com or
www.irs.gov. This information is provided for general awareness only,
and is not intended for the purpose of providing legal, accounting, tax
advice or consulting of any kind. Please consult with your tax professional
for complete details.
Contact us to better understand and take advantage of the first-time
homebuyer tax credit and
get started finding your new home.
The information on this web site for general guidance only. The information
on this site does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any
kind nor should it be construed as such. The information provided herein
should not be used as a substitute for consultation with professional tax,
accounting, legal, or other competent advisers. Before making any decision
or taking any action on this information, you should consult a qualified
professional adviser to whom you have provided all of the facts applicable
to your particular situation or question. None of the tax information on
this web site is intended to be used nor can it be used by any taxpayer, for
the purpose of avoiding penalties that may be imposed on the taxpayer. The
information is provided "as is," with no assurance or guarantee of
completeness, accuracy, or timeliness of the information, and without
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