BUYERS EXPECTING THE FIRST-TIME HOME BUYER TAX CREDIT SHOULD CHECK THE FINE PRINT
September 4, 2009
After closing on his first home earlier this week, 83 year-old Alget Campbell got some disappointing news Thursday: He would not qualify for the first-time home buyer tax credit.
The fine print of the tax provision, which gives a credit of up to $8,000 to buyers who have not owned a home in the last three years, disqualifies individuals whose spouses have owned a home during that same period.
Michael Dobzinski, a spokesman for the Internal Revenue Service, said there are plenty of misconceptions about the so-called first-time home buyer tax credit so it always pays to be familiar with the details before buying.
In Campbell’s case, his wife, Hermine, owns the home in Southwest Miami-Dade County the couple has occupied and plans to rent out to cover the mortgage on the townhome they bought for some $71,000 on Monday. Joan Grant, Campbell’s daughter who helped him through the home buying process, said she was disappointed that her father, a former Publix clerk, would not be getting the credit.
“We were hoping for that, but it’s kind of late now to worry about it,” Grant said. “I was hoping that he would get it since he is actually buying this on his own.” Marcia Pennant, Campbell’s real estate agent, said she had told the couple she was not sure they would qualify, but to consult their tax advisor.
Dobzinski, of the IRS, said to get the credit, an individual or spouse cannot have owned a home three years prior to the date of the new purchase.
Also, to keep the credit, homeowners must use the home as their primary residence for three years.
In addition, the purchase must occur on or after Jan. 1 of this year, but before Dec. 1.
The tax credit is equal to 10 percent of the purchase price of the home, up to $8,000. So, had Campbell qualified, he would have gotten a roughly $7,100 credit.
Dobzinski said people often think they will get the tax credit instantly when, in fact, it requires them to either amend their 2008 tax return or wait until they file for 2009. Because it is a tax credit, a buyer who owed no taxes would get a check of up to $8,000.
If taxes are owed, the credit could knock up to $8,000 off the bill.
The credit is phased out for single filers with a modified gross adjusted income of more than $75,000 a year and married couples filing jointing with incomes above $150,000.
Dobzinski said home buyers should consult with their tax advisor to determine whether they qualify. They can also visit www.irs.gov or call the IRS at 800-829-1040.
When it comes to the $8,000 tax credit for first-time homebuyers, it seems there’s a new program every week to help tap that money today. The credit can be claimed on 2008 or 2009 tax returns. Homebuyers who get a loan backed by the Federal Housing Administration can use the money to cover closing costs and other fees, and at least 10 states offer ways to use the tax credit faster.
“There are some real neat tax planning strategies you can apply now,” said Bob Meighan, vice president of TurboTax. To be eligible, a buyer cannot have owned a home in the past three years. So if you’re ready to buy, here are some tips:
Income considerations: The tax credit, for home purchases made through end of November, comes with income thresholds, $75,000 for individuals and $150,000 for joint filers. After those limits, the credit begins to phase out. If you bought a home this year and expect your 2008 income to be lower than next year’s, it makes sense to file for the credit this year using a 2008 amended return.
However, if you think your income will decrease, due to job loss, wage cuts or hour reductions, it makes more sense to file for the tax credit on your 2009 tax returns to get the most out of the credit, Meighan said.
Tax withholding: Another benefit to waiting until 2009: You can increase your take-home pay. By taking the credit next year, you can change your tax withholding status with your employer now and get more on a paycheck-to-paycheck basis, Meighan said. You’ll be giving up a “fatter” tax refund next year, but each month you’ll have more change in your pocket.
Also, don’t forget to reduce your federal and state tax withholding to account for the tax deduction you can take on the mortgage interest and property taxes you pay.
Bridge loans: Ten states (and the list keeps growing) are offering so-called “bridge loans” for the federal tax credit, so homebuyers can take advantage of the $8,000 before the 2010 filing season. Qualified homebuyers can receive a loan with little to no interest and repay it with the tax credit refund next year.
“I see it as an upside,” Meighan said. “It gives homebuyers more flexibility,” with the money. Each state program varies and some require a minimum downpayment contribution from the buyer. Some nonprofit organizations like NeighborWorks America are also offering bridge loans for the tax credits.
California also enacted its own one-time homebuying credit for newly built homes purchased between Feb. 28 and March 1, 2010. The nonrefundable credit, which is for all buyers, not just first timers, is equal to 5 percent of the purchase price up to $10,000. It can be claimed over a three-year period. The property must be a single-family residence, the principal residence and eligible for the property tax homeowners exception.
A California resident can take both the federal and state tax, according to Kathleen Thies, a state tax analyst at CCH Inc. However, only $100 million has been put aside for the state credit and that money is expected to run out this month or next. And there are no plans to add more funding to the program.
“It’s on a first-come, first-serve basis,” Thies says.
Advance credit: Last month, the FHA said its borrowers can receive advances on the $8,000 first-time homebuyer tax credit from lenders, so they don’t have to wait to get the money next year from the Internal Revenue Service. Borrowers will still have to come up with the FHA’s required 3.5 percent downpayment, but the advance from the tax credit can be applied toward closing costs, fees or to increase the downpayment.
John W. Roth, a senior tax analyst at CCH, believes some lenders won’t participate. The process involves more work for lenders, but lenders can only charge an additional 2.5 percent fee for that. “How many qualified FHA lenders will offer this option to their borrowers will be interesting to see,” he said.
Roth advises homebuyers to wait and receive the money in next year’s 2009 tax return. Said Roth: “There’s always those initial expenses when you move in that are more than you expect.”
FEDERAL PROGRAM TO HELP FIRST-TIME BUYERS USE TAX CREDIT FOR DOWNPAYMENT
May 13, 2009
First-time homebuyers will soon have another option if they want to use their $8,000 tax credit toward a downpayment. On the tails of a Florida-created program that Gov. Charlie Crist is expected to sign into law, the federal government announced its own downpayment assistance program at the National Association of Realtors®
Midyear Legislative Meetings & Trade Expo taking place this week in Washington, D.C. While the tax credit applies to “first-time homebuyers,” the term is misleading. In general, anyone who hasn’t owned a home for the past three years is considered a first-timer under the program. Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD), hopes to have additional details available within a few days, though it’s still unclear how soon homebuyers can apply for the credit.
Donovan said that the Federal Housing Administration (FHA) would allow its lenders to credit homeowners up to $8,000. He made the announcement to several thousand Realtors yesterday at a special daylong session called, The Real Estate Summit: Advancing the U.S. Economy. “We all want to enable FHA consumers to access the homebuyer tax credit funds when they close on their home loans, so that the cash can be used as a downpayment,” Donovan said. According to Donovan, FHA approved lenders will be permitted to “monetize” the tax credit by using short-term bridge loans. Donovan also said that more will be done, and the Obama administration plans to further stabilize the housing market. “I do think we have some early signs that the market overall is stabilizing,” said Donovan. “Since January, we’ve seen both home sales moving up and down around a relatively stable number, and we are seeing the first signs that the rapid decline in home prices is starting to abate.”