It’s official:  The American Recovery and Reinvestment Act of 2009 has authorized a tax credit of up to $8,000 for qualified first-time homebuyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.  (CLICK HERE FOR A PRINTABLE VERSION.)

Q:  What’s the definition of a first-time homebuyer for the purpose of this law?
A:  The law defines a first-time homebuyer as a buyer who has not owned a principal residence during the three-year period prior to the purchase.   (The date on the HUD-1 is the determining factor.) 

For married taxpayers, the law tests the homeownership history of both the homebuyer and his/her spouse.   For example, if you have not owned a home in the past three years but your spouse did, neither of you would qualify for the tax credit.  However, if an unmarried couple jointly buys a home and one person owned a home in the past three years but the other did not, that person can designate the tax credit to the other person to claim on his/her individual tax return.  The same is true if a parent (who already owns a home) co-signed on a loan with his/her child.  The child could claim the first-time homebuyer tax credit.

Q:  If someone owns a vacation home but does not live in it as their primary residence, would they qualify for the tax credit?
A:  Yes.  Owning a vacation home, second home, or rental that is not used as a primary residence does not disqualify the buyer if he/she can prove that it has not been used as a primary residence for the previous three years.

Q:  Is a tax credit the same as a tax deduction?
A:  No.  A tax credit is a dollar-for-dollar reduction in the amount of tax the taxpayer owes.  If someone owed $8,000 in federal income taxes and received the $8,000 tax credit, he would owe nothing to the IRS for that filing period. 

Q:  How is the amount of the tax credit calculated?
A:  The tax credit is equal to 10 percent of the purchase price of the home, up to a maximum of $8,000.

Q:  Are there income limits for claiming the tax credit?
A:  Yes.  The credit is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 (filing single) and $150,000 for married taxpayers filing a joint return.  There is no tax credit for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for MAGIs between these amounts.

Q:  How do you determine your modified adjusted gross income (MAGI)?
A:  Modified adjusted gross income is your adjusted gross income (your total income for the year), minus certain deductions called “adjustments” but before itemized deductions.  (Line 37 on IRS Form 1040)

Q:  If my modified adjusted gross income (MAGI) is over the limit, can I receive any tax credit?
A:  Possibly.  It depends on your income.  Here’s where the formula gets deep.  Suppose a buyer has a modified adjusted gross income of $88,000 which exceeds the $75,000 limit by $13,000.  Dividing $13,000 by $20,000 (the formula) yields 0.65.  When you subtract 0.65 from 1.0, the result is 0.35.  If you multiply $8,000 by 0.35 means that the buyer is eligible for a partial tax credit of $2,800.

Q:  How does this 2009 homebuyer tax credit differ from the one last year?
A:  The 2009 tax credit does not have to be repaid.  The repayment requirement made the 2008 credit essentially an interest-free 15-year loan.  The new tax credit requires homeowners to live in the home for at least 3 years or face repaying the entire credit amount.  Some exceptions apply.

Q:  What types of homes qualify for the tax credit?
A:  The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000/$500,000 capital gain tax exclusion for principal residences.  These include single-family detached homes, attached housing, like condos and townhomes, manufactured/mobile homes, and houseboats.

Q:  How do I claim the tax credit?
A:  When filing your federal income tax return, complete and attach Form 5405 to determine the tax credit amount, and claim that amount on Line 69 of the 1040 form.

Q:  This tax credit is said to be “refundable.”  What does that mean?
A:  When a tax credit is refundable, the credit can be claimed even if the taxpayer has little or no federal income tax liability to offset.  For example, if a first-time homebuyer had a tax liability of $6,000 and received a tax credit for $8,000, the taxpayer would receive a refund check for $2,000.

Between foreclosures, short sales, the lowest mortgage rates in 60 years, and the $8000 tax credit, there's never been a better time to buy!  We are real estate agents specializing in Inner Loop properties, including Rice Military, Montrose, Midtown, River Oaks, Upper Kirby, the Heights, Memorial Park and Camp Logan.