If you are in the market for a new home, you can still take advantage of the home buyer’s tax credit in the next few months, thanks to a new law passed late last year.
If you have a sales contract in place by April 30 and close before July 1, you can receive a tax credit of up to $8,000 for first-time homebuyers and up to $6,500 for repeat homebuyers.
The temporary tax credit for first-time homebuyers had been due to expire Nov. 30, 2009. But in November President Barack Obama signed a law that extended the tax credit and added the new tax credit for certain repeat home buyers.
The government, which estimates the package will cost a total of $11 billion, hopes the measure will stimulate home sales. The real estate market is an important part of the American economy.
Under the new law, first-time homebuyers still receive a credit as much as 10 percent of the home’s purchase price. The new law also extended the maximum price of a new home that can qualify for the tax credit at $800,000. Beyond that, no additional tax credit is available. Also, you do not qualify for the tax credit if you purchase a new home from a lineal ancestor or descendent, including parents, grandparents, children or grandchildren.
If you bought a $50,000 house, for example, you would receive a $5,000 tax credit. The government defines “first-time homebuyers” as people, including both partners if married, who haven’t owned a principal resident for three years prior to the purchase of their new residence.
As mentioned, the extension added a tax credit for repeat homebuyers. To qualify, taxpayers must have lived in one residence for five consecutive years of the eight years prior to the new home purchase date. Similar to the first-time home buyer tax credit, repeat home-buyers receive a tax credit equal to 10 percent of the new home’s purchase price. In this instance, the maximum price of a new home that can qualify for the tax credit is capped at $650,000.
Both the first-time and repeat homebuyer’s tax credits offer dollar-for-dollar reductions of tax and is refundable. If you don’t pay enough tax to offset the credit, you can get a refund. For example, if you qualify for an $8,000 credit but only owe $5,000 in tax, you could receive a $3,000 check from the Internal Revenue Service.
Under the new law, if you buy in 2010, you may claim the credit on either your 2009 or 2010 returns reduce their income tax withholding. In some circumstances HUD allows buyers using FHA-insured mortgages to apply their tax credit toward their house purchase for certain down payment and closing cost expenses.
The new law provides more generous income limits for people who qualify for a tax credit. For single filers, the credits now phase out at $125,000 of adjusted gross income; for married couples, the limit is $225,000 of adjusted gross income.
All buyers who receive a credit must use the new home as principal residence for the next three years. The provision is designed to prevent “flipping,” the practice of buying a house and quickly reselling it.
A principal residence can be a conventional house, a condominium, a co-op apartment, or an attached or semi-attached townhouse. If it has eating, sleeping and toilet facilities, a boat, motor home or trailer may qualify. Manufactured homes qualify in some states.
Fraud was a problem with the previous home-buyer tax credit. As a result, the new law contains anti-abuse measures. Most buyers must be 18 or older.
Also, the documentation requirements are more stringent. Taxpayers taking the credit will have to furnish proof of purchase, such as a copy of the settlement sheet (a HUD-1 form), and fill out an IRS Form 5405.
If you’re wondering, a tax credit is more valuable than a tax deduction. A credit is applied to the taxes that you owe, meaning you get money back or don’t have to pay as much when you file your return.
So if you’ve thought about buying a new home, the extension of the home buyer’s tax credit means it’s time to start perusing the real estate ads and Realtors’ websites.
Chuck Williams is dean of the College of Business at Butler University. Bill Terando, associate accounting professor, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness.com or e-mail Chuck at email@example.com.
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