Previously I only felt bombarded by car commercials. Now I feel inundated by real estate newspaper ads, billboards and even bus stop waiting benches telling me I have to sign up for the home buying tax credit before it’s too late. But thanks to a 1-year-old son, a hectic job and a traveling partner, I just don’t have the time to pore through tax statements to figure it out.
Now that the tax credit is almost over, however, I owe it to myself to learn who qualifies for this, why it’s a good thing and what I can do to get this essentially free money from the government.
“This is a great opportunity for buyers, and has been a positive influence,” says Jim Shapiro, president of the Cincinnati chapter of Real Estate Investors Association (REIA, www.cincinnatireia.com) as well as a realtor and real estate investor. Shapiro says he is seeing increased purchases of homes in a lower price range, around $50,000-$80,000.
“Many people are now going from renting to owning. Most times they can’t rent for what they would pay in mortgage,” Shapiro adds.
The basics for first-timers
First of all, the notion of a “first-time home buyer” is a bit of a misnomer. Qualified first-time home buyers include people looking to buy a new home who have not owned their own home in which they’ve lived full-time at any point in the past three years. So if you just graduated from the University of Cincinnati, where you rented an apartment, and are currently living with your parents to save money, this credit could be a good option for you. But even if you previously owned a home, if you sold it more than three years ago and have since been renting, you qualify.
These buyers can receive a tax credit of up to $8,000 when they buy a “principal residence” — basically, a home of their own that they live in full-time. Buyers receive the money if they purchase a home from now until (or on, if you really enjoy procrastinating) April 30, 2010
You don’t qualify if you are younger than 18 or claimed as dependents by other taxpayers, and the credit is open to any single taxpayer who makes less than $145,000 and married couples filing joint returns who make less than $245,000. If you make between $125,000-145,000 (as a single) and $225,000-245,000 (as a married couple filing jointly), you will receive a decreased tax credit. These amounts were raised once the original tax credit was extended and the old amounts are not retroactive.
Things get interesting if you’re married. The first-time home buyer credit looks at both spouse’s home ownership history. So if you have been renting, but moved in with your home-owning partner after your marriage, neither of you qualify.
You also don’t get a flat $8,000. Instead, you receive a credit equal to 10 percent of your home’s purchase price up to $8,000. So if you buy a house worth $70,000, you can only receive a $7,000 credit.
We already stated that this new house must be your primary residence, but it should be noted that you must live in your brand new home for three years or more after purchase.
How to apply
Still with me? Good. To get your tax credit, you must fill out the appropriate paperwork when filing your taxes. If you’re like me, simply tell your tax advisor that you purchased a new home (or will by the deadlines listed above), and they will fill in the rest of the information.
If you’re a do-it-yourselfer, use IRS Form 5405 to find out how much of a tax credit you’re due to receive, then write in this amount on line 67 of your 2009 1040 income tax form. You must also include your closing statement (also referred to as a HUD-1 settlement form) or certificate of occupancy.
It’s also important to note that this is a tax credit, not a deduction. A deduction would decrease the amount of income taxed, possibly moving you down into a lower tax bracket. However, a credit is more like a check for that amount of money.
And since it’s refundable, it is possible you could receive a check for $8,000. For instance, pretend you qualify for the tax credit. After you finish your taxes, say you then owe IRS $4,000. With the tax credit, you’d actually receive $4,000 back. If you owe the IRS nothing, first of all, double check your work. If it’s correct, you will receive a check for all $8,000.
Move-up/repeat home buyer tax credit
Think this great deal doesn’t apply to you? If your name is on the mortgage of a primary residence you’ve owned (and lived in) for five consecutive years of the eight prior to the purchase date, you may qualify for a tax credit of $6,500.
Married tax payers filing jointly most both qualify as move-up/repeat home buyers. Repeat home buyers also don’t have to spring for a more expensive house than the one they currently own.
On a final note, for both tax credits, it is possible to receive your money earlier than waiting for your tax return check to arrive in the mail. Do this by adjusting your withholding amount on a W-4 form. Learn more through your tax advisor, or at IRS.com.
Even better, you can use your proposed tax credit to help with the down payment and/or closing cost expenses. As long as you have an FHA-insured mortgage, your lender is allowed to give you a loan for up to $8,000. Government agencies can also help the home-buying process by lengthening select loans.
As always, individual tax circumstances may differ, so if you have any questions specific to your claim, contact a tax professional.