Understanding the homebuyer tax credit is a must for any prospective homebuyer. First-time homebuyers may be eligible for a credit of up to $8,000 on homes purchased no later than spring 2010. Repeat homebuyers, thanks to recently passed legislation, have the potential to receive up to $6,500 in credits tax.

In this article, we’ll explore various facets of the tax credit, including qualifying criteria, timeframes in which the credit can be claimed, and potential benefits. For many consumers in this tough economic climate, credit could be a strong contributing factor in the decision to purchase a new home.

What exactly is a tax credit? A tax credit will reduce a taxpayer’s federal tax bill or increase their tax refund, dollar for dollar. For example, let’s say you owe $10,000 on your taxes, but receive an $8,000 tax credit. After applying the credit, your tax bill is reduced to $2,000 ($10,000-$8,000). Alternatively, if you owe $2,000 in taxes, and with the same $8,000 tax credit, you’ll see a $6,000 tax refund. When the homebuyer tax credit was initially created in 2008, it was treated like a low-interest loan; In other words, homebuyers were expected to pay off the loan over time. However, legislation passed in 2009 removed this repayment feature: homebuyers now do not have to repay the credit as long as they continue to use the newly purchased home as their primary residence for at least three years from the date of purchase. the date of purchase. .

First-time homebuyer credit extended

On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009 into law. The primary purpose of this act was to extend the first-time homebuyer tax credit previously created by the Housing and Recovery Act 2008, which was scheduled to expire on November 30, 2009. The stated goal of the US government in creating this loan is to stimulate the housing market and provide a much-needed spark to the economy.

With the new law in place, eligible homebuyers can receive a tax credit of up to 10% of the home’s purchase price, with a maximum credit of $8,000. To claim the credit on their tax returns, homebuyers must purchase, or enter into a binding contract to purchase, a “primary residence” on or before April 30, 2010, and close on the home purchase by June 30. 2010. The term primary residence simply means that for those who own multiple homes, the home that is purchased will be the one in which they will reside most of the time. A “first time homebuyer” is defined as someone who has not owned a primary residence during the three-year period prior to purchase. For married couples, both spouses must meet this requirement.

First-time homebuyer tax credit requirements

To qualify for the first-time homebuyer tax credit under the most recent legislation, the following criteria must be met:

• Homebuyer must not have owned a primary residence during the three-year period prior to purchase. As mentioned above, if you are married, both spouses must meet this requirement
• Homebuyer must have a current contract by April 30, 2010 and the deal must close by June 30, 2010
• The purchase price of the new home cannot be more than $800,000
• The following income requirements apply: For single filers, credits phase out between $125,000 and $145,000 of modified adjusted gross income. For married couples, the range is $225,000 to $245,000. For the average person, the modified adjusted gross income is equal to the adjusted gross income as reported on their tax returns.
• Homebuyers cannot purchase a home from a blood relative or descendant, nor can a person claim the credit if the home is purchased from a spouse or the spouse’s blood relatives.
• The new home must be used as a primary residence for at least three years from the date of purchase.
• Homebuyers cannot take the tax credit if they are claimed as a dependent on someone else’s return.

Key benefits

1. First-time homebuyers received a credit of up to 10% of the home’s purchase price, with a maximum credit of $8,000
2. Homebuyers who bought their home in 2009 can claim the credit on their 2008 or 2009 returns, while those who bought their home in 2010 can use their 2009 or 2010 returns.
3. For military, foreign service, and intelligence personnel serving outside the US on “official extended duty” for at least 90 days during 2009 and the first four months of 2010, the law allows an additional year to take advantage of the tax credit.

Tax exemption for repeat homebuyers

The law enacted on November 6, 20009 added a tax credit for repeat buyers. A person who has lived in a residence for five consecutive years during the previous eight years may qualify for a credit of up to 10% of the purchase price, up to a maximum of $6,500. The new house does not have to cost more than the old one.

To illustrate this scenario, let’s take the example of a person who lived in a house from 2002 to 2007 and then ceased to own it. Since this person lived in a home for five consecutive years, and this period was in the last eight years, he may be eligible for the $6,500 tax credit if he decides to purchase a new home. Basic first-time homebuyer tax credit qualification criteria apply.

Additional Resources

You can find more information about the tax credit at irs.gov. A qualified tax advisor can also be a resource for additional questions and to determine if you qualify.