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The Stimulus Tax Credits Expired April 30, 2010
Congratulations to everyone who took advantage of this historic
opportunity!
Frequently Asked Questions
Current/Repeat Homebuyers $6500 Tax Credit
Updated:
11/25/09
The Worker, Homeownership, and Business Assistance Act of 2009 has
established a tax credit of up to $6,500 for qualified
move-up/repeat home buyers (existing home owners) purchasing a
principal residence after November 6, 2009 and on or before April
30, 2010 (or purchased by June 30, 2010 with a binding sales
contract signed by April 30, 2010).
The following questions and answers provide basic information about
the $6500 tax credit. If you have more specific questions, we
strongly encourage you to consult a qualified tax advisor or legal
professional about your unique situation.
Who is eligible to claim the $6,500 tax
credit?
Qualified move-up or repeat home buyers purchasing any
kind of home are eligible to claim this credit. (see
chart)
What is the definition of a move-up or
repeat home buyer?
The law defines a tax credit qualified move-up home buyer
(“long-time resident”) as a person who has owned and resided in the
same home for at least five consecutive years of the eight years
prior to the purchase date. For married taxpayers, the law tests the
homeownership history of both the home buyer and his/her spouse.
Repeat home buyers do not have to purchase a home that is more
expensive than their previous home to qualify for the tax credit.
How is the amount of the tax credit
determined?
The tax credit is equal to 10 percent of the home’s
purchase price up to a maximum of $6,500. Purchases of homes priced
above $800,000 are not eligible for the tax credit.
Are there any income limits for claiming
the tax credit?
Yes. The income limit for single taxpayers is $125,000;
the limit is $225,000 for married taxpayers filing a joint return.
The tax credit amount is reduced for buyers with a modified adjusted
gross income (MAGI) above those limits. The phaseout range for the
tax credit program is equal to $20,000. That is, the tax credit
amount is reduced to zero for taxpayers with MAGI of more than
$145,000 (single) or $245,000 (married) and is reduced
proportionally for taxpayers with MAGIs between these amounts.
Can you give me an example of how the
partial tax credit is determined?
Just as an example, assume that a married couple has a
modified adjusted gross income of $235,000. The applicable phaseout
to qualify for the tax credit is $225,000, and the couple is $10,000
over this amount. Dividing $10,000 by the phaseout range of $20,000
yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To
determine the amount of the partial first-time home buyer tax credit
that is available to this couple, multiply $6,500 by 0.5. The result
is $3,250.
Here’s another example: assume that an individual home buyer has a
modified adjusted gross income of $138,000. The buyer’s income
exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range
of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result
is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible
for a partial tax credit of $2,275.
Please remember that these examples are intended to provide a
general idea of how the tax credit might be applied in different
circumstances. You should always consult your tax advisor for
information relating to your specific circumstances.
How is this home buyer tax credit different
from the tax credit that Congress enacted in July of 2008? How is
this different than the rules established in early 2009?
The previous tax credits applied only to first-time home
buyers and were for different amounts of money.
How do I claim the tax credit? Do I need to
complete a form or application? Are there documentation
requirements?
You claim the tax credit on your federal income tax
return. Specifically, home buyers should complete IRS Form 5405 to
determine their tax credit amount, and then claim this amount on
line 67 of the 1040 income tax form for 2009 returns (line 69 of the
1040 income tax form for 2008 returns).
No other applications are required, and no pre-approval is
necessary. However, you will want to be sure that you qualify for
the credit under the income limits and repeat home buyer tests. Note
that you cannot claim the credit on Form 5405 for an intended
purchase for some future date; it must be a completed purchase. Home
buyers must attach a copy of their HUD-1 settlement form (closing
statement) to Form 5405 as proof of the completed home purchase.
What types of homes will qualify for the
tax credit?
Any home that will be used as a principal residence will
qualify for the credit, provided the home is purchased for a price
less than or equal to $800,000. This includes single-family detached
homes, attached homes like townhouses and condominiums, manufactured
homes (also known as mobile homes) and houseboats. 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.
It is important to note that you cannot purchase a home from, among
other family members, your ancestors (parents, grandparents, etc.),
your lineal descendants (children, grandchildren, etc.) or your
spouse or your spouse’s family members. Please consult with your tax
advisor for more information. Also see IRS Form 5405.
I read that the tax credit is “refundable.”
What does that mean?
The fact that the credit is refundable means that the
home buyer credit can be claimed even if the taxpayer has little or
no federal income tax liability to offset. Typically this involves
the government sending the taxpayer a check for a portion or even
all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the
tax credit, federal income tax liability of $5,000 and had tax
withholding of $4,000 for the year, then without the tax credit the
taxpayer would owe the IRS $1,000 on April 15th. Suppose now that
the taxpayer qualified for the $6,500 home buyer tax credit. As a
result, the taxpayer would receive a check for $5,500 ($6,500 minus
the $1,000 owed).
Instead of buying a new home from a home
builder, I hired a contractor to construct a home on a lot that I
already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a
principal residence that is constructed by the home owner is treated
by the tax code as having been “purchased” on the date the owner
first occupies the house. In this situation, the date of first
occupancy must be after November 6, 2009 and on or before April 30,
2010 (or by June 30, 2010, provided a binding sales contract was in
force by April 30, 2010).
In contrast, for newly-constructed homes bought from a home builder,
eligibility for the tax credit is determined by the settlement date.
Be sure to check with a tax advisor in cases where a HUD-1 form is
not used at settlement to be sure you have sufficient documentation
to attach to IRS Form 5405.
I am not a U.S. citizen. Can I claim the
tax credit?
Perhaps. Anyone who is not a nonresident alien (as
defined by the IRS) and who has owned and resided in a principal
residence in the United States for at least five consecutive years
of the eight years prior to the purchase date can claim the tax
credit if they meet the income limits. For married taxpayers, the
law tests the homeownership history of both the home buyer and
his/her spouse. The IRS provides a definition of “nonresident alien”
in IRS Publication 519.
Is a tax credit the same as a tax
deduction?
No. A tax credit is a dollar-for-dollar reduction in what
the taxpayer owes. That means that a taxpayer who owes $6,500 in
income taxes and who receives an $6,500 tax credit would owe nothing
to the IRS.
A tax deduction is subtracted from the amount of income that is
taxed. Using the same example, assume the taxpayer is in the 15
percent tax bracket and owes $6,500 in income taxes. If the taxpayer
receives a $6,500 deduction, the taxpayer’s tax liability would be
reduced by $975 (15 percent of $6,500), or lowered from $6,500 to
$5,525.
Is there a way for a home buyer to access
the money allocable to the credit sooner than waiting to file their
2009 or 2010 tax return?
Yes. Prospective home buyers who believe they qualify for
the tax credit are permitted to reduce their income tax withholding.
Reducing tax withholding (up to the amount of the credit) will
enable the buyer to accumulate cash by raising his/her take home
pay. This money can then be applied to the downpayment.
Buyers should adjust the withholding amount on their W-4 via their
employer or through their quarterly estimated tax payment. IRS
Publication 919 contains rules and guidelines for income tax
withholding. Prospective home buyers should note that if income tax
withholding is reduced and the tax credit qualified purchase does
not occur, then the individual would be liable for repayment to the
IRS of income tax and possible interest charges and penalties.
HUD allows “monetization” of the tax
credit. What does that mean?
It means that HUD will allow buyers using FHA-insured
mortgages to apply their anticipated tax credit toward their home
purchase immediately rather than waiting until they file their 2009
or 2010 income taxes to receive a refund. These funds may be used
for certain down payment and closing cost expenses.
Under the guidelines announced by HUD, non-profits and FHA-approved
lenders are allowed to give home buyers short-term loans. The
guidelines also allow government agencies, such as state housing
finance agencies, to facilitate home sales by providing longer term
loans secured by second mortgages.
Housing finance agencies and other government entities may also
issue tax credit loans, which home buyers may use to satisfy the FHA
3.5 percent down payment requirement.
In addition, approved FHA lenders can purchase a home buyer’s
anticipated tax credit to pay closing costs and down payment costs
above the 3.5 percent down payment that is required for FHA-insured
homes.
If I’m qualified for the tax credit and buy
a home in 2009 (or 2010), can I apply the tax credit against my 2008
(or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to
treat qualified home purchases in 2009 (or 2010) as if the purchase
occurred on December 31, 2008 (or if in 2010, December 31, 2009).
This means that the previous year’s income limit (MAGI) applies and
the election accelerates when the credit can be claimed. A benefit
of this election is that a home buyer in 2009 or 2010 will know
their prior year MAGI with certainty, thereby helping the buyer know
whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their prior year tax
return, but who have already submitted their tax return to the IRS,
may file an amended return claiming the tax credit using Form 1040X.
You should consult with a tax professional to determine how to
arrange this.
For a home purchase in 2009 or 2010, can I choose whether to treat
the purchase as occurring in the prior or present year, depending on
in which year my credit amount is the largest?
Yes. If the applicable income phase out would reduce your home buyer
tax credit amount in the present year and a larger credit would be
available using the prior year MAGI amounts, then you can choose the
year that yields the largest credit amount.
> 2009 American
Recovery and Reinvestment Act - $8000 & $6500 Homebuyer Tax Credit -
Updated:
11/25/09
> 2009 Economic Stimulus Plans -
$8,000 Tax Rebates Incentives for First-time Homebuyers
>
2009 FHA Changes & Down Payment Assistance
>
2009 Economic Stimulus Package Overview -
Updated:
2/17/09
> Homebuyer & Homeowner Stimulus
Package -
Released
2/6/09
The information on this web site for general
guidance only. The information on this website does not constitute the provision
of legal advice, tax advice, accounting services, investment advice, or
professional consulting of any kind nor should it be construed as such. The
information provided herein should not be used as a substitute for consultation
with professional tax, accounting, legal, or other competent advisers. Before
making any decision or taking any action on this information, you should consult
a qualified professional adviser to whom you have provided all of the facts
applicable to your particular situation or question. None of the tax information
on this web site is intended to be used nor can it be used by any taxpayer, for
the purpose of avoiding penalties that may be imposed on the taxpayer. The
information is provided "as is," with no assurance or guarantee of completeness,
accuracy, or timeliness of the information, and without warranty of any kind,
express or implied, including but not limited to warranties of performance,
merchantability, and fitness for a particular purpose.
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