INHABIT AUSTIN: real estate

Housing Stimulus: First Time Home Buyer Tax Credit

26 02 2009

No matter which side of the political aisle you hang your hat on, the recent economic stimulus package has left many still wondering, ”How will this help me?”

If you plan to buy or sell your primary residence this year, then look no further than page 202 of the 407 page American Recovery and Reinvestment Act of 2009. In order to encourage consumer demand in the housing market, a small portion of the $787 billion total–approximately $6 billion–will make it’s way to the pockets of home buyers in the form of a tax credit.

Among many other things, Congress approved some key changes to the First-Time Home Buyer Credit, which was initially authorized under the Housing and Economic Recovery Act of 2008. And in record fashion, the IRS has already updated the tax Form 5405for you to take full advantage by filing for 2008 or 2009. Please consult with your CPA, tax attorney or other financial advisor to discuss your specific qualifications.

Who May Be Eligible:

You purchased a primary residence (main home) after April 8, 2008 and did not own a home for three years prior.

You purchase a primary residence before December 1, 2009 and do not own for three years prior to the purchase date.

Your modified adjusted gross income is $75,000 or less ($150,000 if married, filing jointly).

One of the most notable changes to the initial tax credit passed in 2008 is the waiver of the repayment schedule for homes that were purchased in 2009. Many have concluded, the whole notion of repayment was counterproductive for a demand-side incentive to stimulate home sales. Unfortunately, Congress didn’t retroactively extend the perk to all of those who made a qualified purchase in 2008.

For those looking to buy in 2009, the tax credit no longer works like an interest free loan, but rather potentially as an outright refund. Of course, as is often the case with U.S. tax law, one caveat remains: You must retain the home as your primary residence for 3 years, otherwise you’ll be required to repay the credit.

So technically, the expanded provision does more to loosen the attached string, but doesn’t sever it entirely. Regardless, I expect this to help many renters who have been positioning themselves to enter the market and find a great deal on their first home. And assuming they keep the home for three years or more, they’ll receive a nice gift from their Uncle Sam.

Below is a comparison of the modifications made to the previous tax credit…

FEATURE	CREDIT AS CREATED JULY 2008 APPLIES TO ALL QUALIFIED PURCHASES ON OR AFTER APRIL 9, 2008	REVISED CREDIT – EFFECTIVE FOR PURCHASES ON OR AFTER JANUARY 1, 2009 AND BEFORE DECEMBER 1, 2009
Amount of Credit	Lesser of 10 percent of cost of home or $7500	Maximum credit amount increased to $8000
Eligible Property	Any single family residence (including condos, co-ops, townhouses) that will be used as a principal residence.	No change All principal residences eligible.
Refundable	Yes. Reduces (or can eliminate) income tax liability for the year of purchase. Any unused amount of tax credit refunded to purchaser.	No change Purchasers will continue to receive refund for unused amountwhen tax return is filed.
Income Limit	Yes. Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return). Phases out above those caps ($95,000 and $170,000).	No change Same income limits continue to apply.
First-time Homebuyer Only	Yes. Purchaser (and purchaser’s spouse) may not have owned a principal residence in 3 years previous to purchase.	No change Still available for first-time purchasers only. Three-year rule continues to apply.
Revenue Bond Financing	No credit allowed if home financed with state/local bond funding.	Purchasers who utilize revenue bond financing can use credit.
Repayment	Yes. Portion (6.67% of credit or $500) to be repaid each year for 15 years, starting with 2010 tax filing.	No repayment for purchases on or after January 1, 2009 and before December 1, 2009
Recapture	If home sold before 15-year repayment period ends, then outstanding balance of repayment amount recaptured on sale.	If home is sold within three years of purchase, entire amount of credit is recaptured on sale. Applies only to homes purchased in 2009.
Termination	July 1, 2009 (But note program changes for 2009)	Tuesday, December 01, 2009
Effective Date	Purchases on or after April 9, 2008 and before January 1, 2009. Repayment to begin for 2010 tax year.	All revisions are effective as of January 1, 2009