There is a well publicized $8,000 Federal Income Tax incentive available to first time home buyers.  This incentive is designed to encourage people to purchase principal residences.  It not only helps those who want to own their own home but also helps stimulate the residential real estate market overall.

 

The Credit

The credit is not a flat $8,000.  The law provides that a qualifying taxpayer can receive up to 10% of the home purchase price as a Federal tax credit.  The maximum possible Federal tax credit is $8,000. If the purchase price is below $80,000, then the credit is less than $8,000.  The purchase price is computed as being the Adjusted Basis on date of Closing.  This includes qualifying capitalized costs such as legal fees, certain title charges, etc.

 

Credit vs. Deduction

This is a tax credit, not merely a deduction.  This means that it reduces a taxpayer’s income tax, dollar for dollar.

 

Refundable Credit

This is a refundable credit and is not dependent upon the taxpayer’s income tax or tax paid in.  Once the credit reduces the taxpayer’s tax to zero, it becomes a refund.  A taxpayer can get a tax benefit even if they paid in no Federal Income Tax during the year.

For example, for 2009, a taxpayer has a Federal tax of $5,000 and has paid in $4,000 during the year.  The tax due is $1,000.  If the taxpayer qualifies for the full $8,000 First Time Home Buyer Credit, the taxpayer can use the first $1,000 of the credit against their tax due and then get a refund of the remaining $7,000.

 

Qualification

Home: The home must be “qualified.” The home must be the taxpayers’ principal residence. The home must be located in the U.S. Manufactured homes, houseboat, and certain other non-traditional residences may qualify if they have a kitchen, bathroom, sleeping facilities, etc.

Buyer: The buyer must be “qualified.”

  • The buyer must not have owned a principal residence in the 3 years prior to the date of the closing on the purchase.
  • If the buyer is married, both spouses must qualify.
  • The taxpayer must be a U.S. Citizen or have an approved type of non- Citizen residency status.

There are special rules for joint owners who are not married.

Closing Date

The taxpayer must close on the purchase between 1/1/09 and 11/30/09.  If the closing takes place before or after these dates then they do not qualify for the 2009 $8,000 credit. It does not matter when the contract was entered into or whether the closing might have been delayed for reasons beyond the buyer’s control. (Please note that there was a prior incentive credit for first time home buyers that might apply if the taxpayer closed prior to 1/1/09.)

 

Holding Period

The taxpayer must maintain the home as their principal residence for 36- months after the date of the closing or the credit may have to be repaid.

Phase-Out: The credit is not available to what Congress considers to be “wealthy” taxpayers.  The law provides that as a taxpayer’s Modified Adjusted Gross Income (MAGI) goes up, the tax credit begins to phase out. At some point, the credit completely phases out and no benefit is available.  There is only a $20,000 window between the place where the credit begins to phase out to the point where it is completely phased out.

Phase Out For Single Taxpayers:

For single taxpayers, the credit begins to phase out once the taxpayer’s MAGI reaches $75,000.  The single taxpayer’s credit is completely phased out once their MAGI reaches $95,000.  $95,000 – $75,000 = $20,000 phase out window.

Phase Out For Married Taxpayers: For married taxpayers, the credit begins to phase out once the taxpayer’s combined MAGI hits $150,000.  The married taxpayer’s credit is completely phased out once their combined MAGI reaches $170,000.  $150,000 – $170,000 = $20,000 phase out window.

Examples Illustrating the Calculation and Phase Out of Credit: Here are a few examples of how the credit is computed.  The 10% of purchase price and phase out figures noted above are used below to illustrate how the different computations work and interact.

Computation of Credit:  A qualified first time home buyer pays $58,000 for a new principal residence and has additional capitalized closing costs of $2,000 resulting in an Adjusted Basis/Purchase Price of $60,000.  The maximum possible credit is $6,000. The computation is as follows: $58,000 + $2,000 = $60,000.  $60,000 x 10% = $6,000.

Phase Out of Credit: A Single person’s Purchase Price is $100,000 and he has MAGI of $90,000.  This taxpayer’s credit is $2,000 even though the purchase price exceeded $80,000.

The computations are as follows:  $90,000 MAGI – $75,000 = $15,000.

$15,000/$20,000 phase out window = 75% phased out.  100% possible credit – 75% phased out = 25% Credit allowed.  $8,000 x 25% = $2,000.

Limited Credit Then Phased Out:  A Single person’s Purchase Price is $60,000 and he has MAGI of $85,000.  The Credit is $3,000.

The computations are as follows:  $85,000 MAGI – $75,000 = $10,000.

$10,000/$20,000 = 50% phased out.  100% possible credit – 50% phased out = 50% Credit allowed.  $6,000 x 50% = $3,000.

 

Claiming the Credit

Taxpayers who qualify for a credit must file a Federal U.S. Income Tax Return (Form 1040).  The taxpayer would prepare their Return as they normally do, but then also prepare and attach IRS Form 5405.  IRS Form 5405 is used to determine credit eligibility and the amount of the credit.

 

11/2009

Copyright ©, Keith B. Baker – 2009

This article is designed to be a public resource of general information. It does not constitute “legal advice” nor does it create a “client-attorney” relationship. While the information is intended to be accurate, this cannot be guaranteed. Tax laws are complex and constantly changing as a result of new laws, regulations, court interpretations and IRS pronouncements. Often, there are also various possible interpretations.  Further, the applicable rules can be affected by the facts and circumstances of a particular situation. Because of this, some of the information may no longer be correct or may not apply to all situations. We are not responsible for any consequences or losses resulting from your reliance on such information. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.

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