How the 2009 New Homebuyer Tax Credit Works

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In addition to the new car tax credit I attempted to explain yesterday, the economic stimulus package also includes a new homebuyer tax credit. The credit has several restrictions, but it could save you a lot of money on your taxes if you haven’t owned a home in the last three years. Here’s how the first-time homebuyer tax credit works.

New Homebuyer Tax Credit Eligibility Dates

The credit applies to homes purchased between January 1, 2009 and December 1, 2009. That means the sale has closed, regardless of the date you actually moved in. If your sale closes on December 2, 2009, you don’t qualify. Likewise if it closed before December 31, 2008.

Qualifying Home

Only principal residences in the United States qualify. It can be a condo, a townhome, or a single family home, but it must be the home you live in more than 50% of the time. Vacation homes and investment properties are not eligible. You may not purchase the home from a relative.

Qualifying Buyers

The bill carefully defines first-time homebuyers as anyone who hasn’t owned a home in the last three years. So, if you sold your last home on May 15, 2006, you will qualify as a first-time homebuyer if you buy a new home on May 16, 2009. You or your spouse can’t have owned a home in the meantime.

Qualifying Income

Unlike the new car credit, the income restrictions are much lower. The full credit applies to individuals with an adjusted gross income up to $75,000 and married couples earning up to $150,000. The credit then phases out for incomes up to $95,000 and $170,000, respectively. Once you exceed those limits, you don’t qualify for the credit.

Homebuyer Credit Amount

The credit is for 10% of the purchase price or $8,000, whichever is lower. If you buy a home worth $60,000, you’re only eligible for a $6,000 credit. If you buy a home for $250,000, the maximum credit is still $8,000.

Repayment Rules

Unlike the $7,500 credit offered to homebuyers until December 31, 2008, this credit does not need to be repaid unless you sell the home within 36 months of the purchase.

Refundable Rules

The credit is refundable. That means that you can receive a refund in excess of the tax you owe on your income. So, if you owe $5,000 in taxes for the year and buy an $80,000 home, then you would receive $3,000 from the IRS after filing your return.

How to Claim the New Homebuyer Tax Credit

The credit is only available after you buy the home, so it won’t help you with the down payment. The credit does, however, reduce your tax due dollar-for-dollar. If you owe $8,000 in taxes, buy a home for $80,000, and have an AGI below $150,000 (if married), then your tax is completely eliminated.

Once the sale closes you have four options for claiming the credit:

  • Close the sale before April 15, 2008 to claim it on your 2008 tax return due on April 15
  • File for an extension, then close the sale before October 15, 2008 to claim it on your 2008 tax return
  • File your return now, then file an amended return to claim it on your 2008 return
  • Claim the credit on your 2009 return, due April 15, 2010.

If your income was higher than the cap in 2008, but you expect to fall below the cap for 2009, then you should wait to claim the credit. However, if you expect your AGI to exceed the cap in 2009 and didn’t exceed it in 2008, then claim it on this year’s tax return.

The Bottom Line

Here’s the bottom line: if you were already planning to buy a home, then this is a nice bonus. However, it doesn’t make the home cheaper since it doesn’t help with the down payment. Instead, buy a home you can afford with a mortgage you qualify for and the largest down payment you can provide. Make the best deal you can for the home. Don’t add $8,000 to your maximum price because you know you’ll get the credit. Unless you send that $8,000 to the lender as soon as you receive it, you’ll have to pay interest on it for the next 30 years.

If you can’t afford to buy a home this year, then you still can’t even with the credit.

If you were considering buying a home in early 2010, then it may be worthwhile to buy this year. Again, that’s only if you can afford it this year. If you expect home prices to fall significantly in your area and don’t expect to stay in the home more than five years, then continuing to wait will save you more than the credit in the long run.

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