Questions About The First Time Home Buyer Tax Credit
A deeper look at the First Time Home Buyer Tax Credit.
Update: The amendment allowing for the extension and expansion recently passed and was signed into law by the President. You can read up on the new rules and changes in the most current post on the latest version in “First Time Home Buyer Tax Credit – The New Extension And Expansion.”
As I look through my Google Analytics for my site, I’ve been seeing a lot of keywords revolving around the First Time Home Buyer Tax Credit currently being offered by the government. The keywords have been an interesting look at what’s on people’s minds as they surf the internet looking for more information on this tax credit. Although I had already written a post outlining the tax credit, some of the keywords I’ve been seeing are about issues I didn’t cover in my original post, so I thought I’d take a moment and answer some of them.
Eligibility.
I covered this in my previous post, but many people are searching for information on whether or not they are eligible for the First Time Home Buyer Tax Credit. Eligibility is determined quite simply.
1) You have to be a first time home buyer. First time home buyer does not mean you have never owned a house. “First time home buyer” is defined as someone who has not owned a home in the past three years.
2) You must make under $75,000 a year for a single person or $150,000 for a married couple filing jointly.
3) You must occupy the home as your primary residence. You can not buy the property as a vacation home or investment property.
4) You must purchase (or have purchased) the home between January 1, 2009 and December 1, 2009. Purchases outside of these dates are not eligible for the current $8,000 tax credit (if you are interested in information about 2008’s $7,500 tax credit, consult the IRS, your tax professional, or contact me.
Repayment.
The money received from the First Time Home Buyer Tax Credit is not repayable. As long as you abide by the rules and remain in the house for three years. If you sell your new home before the three year anniversary, the government will ask for its money back and take it directly from the proceeds of your sale.
Amount.
The tax credit is paid out as 10% of the purchase price or $8,000, which ever is less. As long as you buy a home at $80,000 or higher, you would receive $8,000. One thing to note, since this is a tax credit, if you owe taxes when you file, this credit will be applied to that amount. For instance, if your tax liability when you file is $2,000, then the IRS will take $2,000 out of your $8,000 tax credit and send you a check for $6,000. If you owe the IRS more than $8,000, they will use that money to pay down your balance and you will receive no check at all.
I have seen several numbers floating around in my keywords – $7,500, $10,000, $15,000, etc. The federal government is only offering $8,000 (they gave out $7,500 in part of 2008, but that was repayable over 15 years). Some states have proposed and passed bills adding additional money to spur housing market growth, but Texas is not one of them.
Filing.
In order to claim your tax credit, you must have purchased the home already. There has been some bad misinformation about the tax credit out there indicating you can claim it now and buy later. I myself was told this by a panel of “experts” and after doing quite a bit of research (including calls to friends working at the IRS), I can say without a doubt that this is false (and it says it on the IRS website). Even if it were possible, I would never advise a client to attempt this. The government does not look kindly on fraud – especially when its their money. If you were to claim it and then for some reason not buy a house, I can’t imagine the government would not come back to you demanding repayment and include penalties and interest.
Because of this fact, you can not use the tax credit as a down payment, to pay closing costs, or get into a home with no money down. However, if you do know your overall tax liability and can calculate how much of a tax credit you will be receiving, I have seen several buyers borrow money from relatives in order to help pay the up front costs and then repay the relative’s loan using the IRS tax credit when they receive the check. I would advise that you have your taxes prepared in advance, so that you know exactly what you’ll be getting back in order to not let down your relatives in case you receive less than you expected.
The tax credit is claimed using IRS Form 5405 (pdf file). Note: this form is used to claim both the old $7,500 repayable tax credit and the current $8,000 tax credit.
This form can be filed with your 2008 tax return (filed on April 15, 2009) or your 2009 tax return (filed on April 15, 2010). If you are buying a house this year and already have filed your taxes (prior to buying), there are two things you can do. One, you can wait and claim the tax credit on your 2009 tax return (April 15, 2010) or two, you can file an amended return now. As with any tax issue, I advise you to speak with a tax professional.
Filing for the First Time Home Buyer Tax Credit is as easy as filing out the form. There are no additional documents needed to claim the tax credit, although I would keep all your closing documents in a safe place in case you’re ever audited (I always keep copies of my client’s documents for this purpose as well as having copies for county tax assessments, title issues, future sale of the home, etc.). Your check should arrive in about the same amount of time it takes to get a refund normally. It is not sent out as a special one-time mailing or anything like that. The IRS processes your tax forms as always and cuts the check from there. Simple as that.
Helpful?
I hope this was helpful in answering some of the questions I’ve seen coming through the various search engines. If there’s a specific question that wasn’t answered for you here or in my previous post, feel free to contact me and I’ll get you the answers.
It’s definitely a great value to first time home buyers to take advantage of this tax credit. If you’re ready begin your search here or contact me and I can start your search for you and have new homes e-mailed to you as they become available.
photo courtesy of tj scenes
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Comments
Great job keeping your readers up to speed on this. I’ve heard a lot of blog buzz lately that the credit can be used toward a down payment on FHA loans. Have you heard anything on that front?
Brandon – Thanks. There has been a lot of buzz about it lately, from Realtors®, NAR, consumers, and HUD. Unfortunately, as of right now, it is not possible to use the First Time Home Buyer Tax Credit as a down payment. HUD is apparently working on something, but pre-maturely announced it by releasing Mortgagee Letter 9-15 on their site (then pulling it). It’s caused a big mess for many people as there is a lot of confusion.
I have spoken about it several times, in fact one of my latest posts covers the story a bit: “Why the politics of NAR should matter to you.”
I also wrote about it here:
“NAR, You Silly Old Goat…Why Would You Let This Be Emailed To Every Realtor® After Yesterday?
And I’ve commenting like a madman on the realtor.org site as well as AgentGenius. I’m trying to get the word out to as many people as possible, so that no one winds up confused and disappointed. HUD says there is something coming, but for now, is not issuing a release date for the new information. Once I have it (and have it confirmed), I will post about it.
Thanks for stopping by.
Actually, according to the IRS about 90% of people filing for this credit are being asked to provided additional documentation. I have waited 6 months and everytime I called they extended the amount of time till refunds would be sent out. After just receiving a notice in the mail to provide additional documentation I realized it will take forever. The documentation they are requesting is not in your closing documents….It needs to be obtained through your title company or elsewhere. Basically, your working hard to get this 8,000! They sure as heck don’t want to pay what the promised!
Jessica – I have not heard of any problems like these from my clients or others I know. I’m curious if you can tell me what the document they are requesting is. I can understand your frustration if you’ve had to wait and wait and wait – no one wants to do that. Good luck getting what you need to receive your tax credit, as far as the documentation, if you used a real estate agent, try giving them a call to help you get what you need in order.
So, what happens now if someone buys too much house and ends up in foreclosure? Do they also default on the tax credit?
feel at home – I stripped the URL out of your post as it was misleading (it wasn’t a blog post, but rather an advertisement/partner link for H&R Block). I did think your comment was relevant though, so I wanted to talk about that.
If someone buys too much house, my first question would be, how? Banks are being much more strict with the amounts they’re willing to qualify someone for and with the loan officer’s and underwriter’s feet to the fire, they are be being much more cautious of who gets the “Approved” stamp.
That being said, the rules on the tax credit requires no re-payment as long as the homeowner lives in the home for three years. If they were to default in the first three years, they would be need to repay the full amount of their tax credit back to the IRS. If they foreclosed later than the three year mark, they would not need to repay the credit.
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