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Looking to Purchase a New Home?
Allan G. Steinman, MBA, CPA
Principal, Tax Services
Principal, Accounting and Assurance Services
November 16, 2009
There's an old saying that home is where the heart is―but it's also an important economic engine for the country. Homebuyers are consumers of mortgages; furnishings; appliances; electronics; landscaping materials; and carpentry, electrical and plumbing services.
Of late, that engine has stalled.
As a result, last year the federal government stepped in to help first-time homebuyers purchase houses by offering a homebuyer's tax credit. Originally set to expire last summer, the credit was extended through November 30, 2009.
This fall, Congress acted to once again extend the popular tax credit and President Obama signed it into law as part of the Worker, Homeownership, and Business Assistance Act of 2009. The Act extends the homebuyer's credit into 2010 and also expands it to cover a new group of existing homeowners under revised rules.
Initial Versions of the First-time Homebuyer's Credit
The original homebuyer's credit applied to homes purchased between April 8, 2008, and July 1, 2009 and was available to first-time homebuyers who met certain income limitations. The credit was equal to ten percent of the purchase price, up to a maximum of $7,500 and had to be paid back to the government over a period of 15 years―or earlier if the house was sold.
Last year, the first-time homebuyer's credit was enhanced by increasing the maximum credit amount from $7,500 to $8,000 and eliminating the repayment requirement as long as the house was not sold within three years of purchase. The revised credit applied to homes purchased on or after January 1, 2009 and before December 1, 2009. It was subject to phase-out based on the buyer's adjusted gross income.
The Newly Expanded Homebuyer's Credit
Under the provisions of the new Act, the homebuyer's credit has been extended and also expanded to include a new group of homebuyers.
 Qualifying Buyers
In addition to first-time homebuyers, the credit now applies to existing homeowners who want to move up to more expensive homes or downsize to less expensive homes. To qualify, existing homeowners and their spouses must have lived in the same principal residence for five consecutive years during the eight-year period that ends on the purchase date of the new home. Existing homeowners are not required to sell their existing homes―they can maintain them as second homes or wait to sell them until a rebounding market supports higher selling prices.
For purchases made under the new rules―in other words, after November 6, 2009―the credit phases out for single buyers with modified adjusted gross incomes between $125,000 and $145,000 and for married buyers filing joint tax returns with modified adjusted gross incomes between $225,000 and $245,000.
Qualifying Purchases
The revised credit generally applies to qualifying homes purchased (i.e., closed) by April 30, 2010―or under secured binding contracts by April 30 as long as the purchase is completed by July 1, 2010. However, there are special provisions for certain service members on qualified official extended duty service outside of the U.S.
To qualify for the revised credit, the home's selling price must be no more than $800,000. The home must be located in the United States and must be a principal residence―second homes, vacation homes, and rental properties do not qualify for the credit.
Amount of the Credit
For first-time homebuyers, the amount of the homebuyer's credit is equal to ten percent of the purchase price of the home. As a result, the maximum credit for first-time homebuyers is $8,000 ($4,000 for married taxpayers filing separate returns). For existing homeowners, the maximum credit is limited to $6,500 ($3,250 for married couples filing separate returns).
The credit reduces the homebuyer's federal income tax liability, dollar for dollar. If the amount of the credit exceeds the homebuyer's tax liability, the excess amount can be refunded.
For qualifying purchases made in 2009, homebuyers can claim the credit on their 2008 (amended) or 2009 returns. For qualifying purchases made in 2010, homebuyers can claim the credit on their 2009 or 2010 federal income tax returns.
Repayment Provisions
As long as the home remains the buyer's principal residence for three years after the purchase, the credit does not have to be repaid.
If the home is sold or does not remain the buyer's principal residence for the required three years, the buyer must repay the entire amount of the credit.
Anti-abuse Provisions
For purchases made after November 6, 2009, the homebuyer must have attained 18 years of age as of the date of purchase―or must have a spouse that meets the age requirement. In addition, the homebuyer cannot be claimed as a dependent by another taxpayer for the tax year in which the home was purchased, and the home cannot be purchased from a person related to the buyer or the buyer's spouse.
Beginning with the 2009 tax return, homebuyers must attach properly executed copies of their settlement statements to their returns in order to claim the credit.
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