Home Buyer Tax Credit Extension & Expansion

01/30/10 – This easy-to-follow brochure about the 2010 Tax Credit is available from the Real Estate Buyer’s Agent Council.

Update 12/5/09 – The IRS guidelines  about the renewed and expanded home buyer tax credit were recently released.   There’s a great Q&A section in the new guidelines, which includes playing out various scenarios.

On Thursday, 11/5/2009, the House of Representatives passed HR 3548 – The Unemployment Compensation Extension Act of 2009 by a vote of 403-12. It includes an amendment (SA 2712 Section 11) to HR 3548 that was attached by the Senate, extending and expanding the home buyer tax credit, before it was passed by the Senate on Wednesday, 11/4/2009, by a vote of 98-0.

The bill and amendments are difficult to read, but the links are above, if you’re interested. The National Association of REALTORS® (NAR) has a summary chart explaining the difference between the new rules and the ones that will expire on November 30, 2009.

The bill was signed into law by President Barack Obama on Friday, 11/6/2009.

The current $8,000 tax credit is extended to May 1, 2010 (10% of the home purchase price, up to $8,000)

• The home buyer must be in a “written binding contract” before May 1, 2010, and must close on that contract before July 1, 2010.
• A new tax credit has been created for “long time residents of same principal residence.” Here is the actual verbiage of the new tax credit for current home owners:  “EXCEPTION FOR LONG-TIME RESIDENTS OF SAME PRINCIPAL RESIDENCE.–In the case of an individual (and, if married, such individual’s spouse) who has owned and used the same residence as such individual’s principal residence for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, such individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence. “
• The tax credit for existing “long time resident” home owners purchasing a new home is 10% of the purchase price, up to $6,500.
• The old $8K credit had income limits of $75,000 for singles and $150,000 for married couples filing jointly. The income limits have been increased to $125,000 / $225,000.
• No credit shall be allowed for the purchase of any residence if the purchase price exceeds $800,000.
• The tax credits apply to primary residences only. No second home or investment properties are eligible for the tax credit.
• For members of the Armed Forces deployed on duty outside the United States, the tax credits are extended to May 1, 2011 (must close before July 1. 2011). They must be deployed outside the U.S. for at least 90 days between Dec 31, 2008 – May 1, 2010.
• “Fraud prevention” measures have been implemented. The tax credit can not be claimed by anyone under 18 years of age. A “properly executed copy of the settlement statement used to complete such purchase” must be attached to the tax return claiming the credit.

Here is a brief Q & A from the National Association of REALTORS® (NAR) about the new tax credit:

Q. Existing homeowner credit: Must the new house cost more than the old house?

A. No. Thus, for example, individuals who move from a high cost area to a lower cost area who meet all eligibility requirements will qualify for the $6500 credit.

Q. I am an existing homeowner. On October 25, 2009, I signed a contract to purchase a new home. I have lived in my current home for more than 5 consecutive years and am within the new income limits. I will go to settlement on November 20. If President Obama has signed the bill by the time I go to settlement, will I qualify for the new $6500 tax credit?

A. Yes. The existing homeowner credit goes into effect for purchases after the date of enactment (when the bill is signed). There is no reference to the date of contract for the new credit. The provision looks solely to the date of purchase, which is generally the date of settlement.

Q. I am a first-time homebuyer but was not within the prior income limits at the time I entered into my contract to purchase on October 30, 2009. I will be covered, however, by the new income limits. If the new rules have been signed into law by the time I go to settlement, will I be eligible for a credit?

A. Yes. The new income limitations go into effect as soon as the President has signed the bill. The income limit and other eligibility rules will look to your status as of the date of purchase, which is the settlement date. So if the new rules have been signed when you go to settlement, you should be eligible for the credit (or a portion of the credit if you’re within the phase-out range).

Q. I am an eligible existing homeowner. I have a fair amount of equity in my home. I have found a home with a non-negotiable price of $825,000. Will I be able to use any of the $6500 tax credit?

A. No. The $800,000 cap on the cost of the purchased home is firm at $800,000. Any amount above $800,000 makes the home ineligible for any portion of the credit. The $800,000 is an absolute ceiling.

Q. I owned my home for 10 years, but sold it two years ago year and have been renting since. If I purchase a home, will I be eligible for the $6500 tax credit if I meet all the other eligibility tests?

A. Yes. Because you lived in the home for more than 5 consecutive years of the previous 8, you will qualify for the $6500 credit. For example, Say John and his wife bought a home in 2000 and lived there until 2008 when he got a divorce. Whether John has been renting or bought in the interim, he WOULD INDEED be eligible for the credit because he owned a home and occupied it as his principal residence for 5 consecutive years out of the last 8 years. The keyword here is “consecutive.” As long as he lived in that house for 5 years straight, what he did since 3 years doesn’t impact eligibility.

Q. I am an eligible first-time homebuyer. I entered into a contract to purchase on November 1, 2009. Do I have to go to closing before December 1? How does the extension date affect me?

A. You do not have to close before December 1. Once the legislation has been signed, it will be as if the Nov 30 date had never existed. Therefore, so long as the contract settles before April 30 (or July 1, worst case), the purchaser will be eligible for the credit.

Some economists at Goldman Sachs have estimated that 70% of all current home owners may be eligible for the expanded tax credit.  The National Association of REALTORS® and other organizations will no doubt be salivating over the extension and expansion of the tax credit program.  Some Senators have stated that the chances of the tax credit being extended again (after April 30) are virtually zero).

I’m not sure how I feel about the tax credit extension.  It will be hugely expensive (some have estimated the cost at $11 billion.)  If you are eligible and otherwise able to purchase a home, by all means take advantage of what you entitled to.  If the tax credit alone entices you to buy a home, I don’t think that, in-and-of-itself, is a good reason.  Let me ask you: Will this encourage you to buy a home?

Disclaimer:  I am your real estate professional, attempting to sort this all out and bring you the latest facts.  I am not an attorney nor a tax professional – you should seek their counsel.

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The following is information on the 2009 (old) First-time Homebuyer Tax Credit

Amount of Credit
10% of the cost of your home, not to exceed $8,000

Eligible Homes
Any single-family residence (including condos & coops) that will be used as your principal residence.

Refundable (even if you don’t owe $8,000 in taxes)
YES. Reduces income tax liability for the year of purchase, but can be claimed on 2008 tax return if home purchased before filing or with amended return.

When do I get the cash?
When you receive your 2008 (or ’09) income tax refund

Taxable Income Limit
Yes. Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return). Phases out above those amounts (at $95,000 and $170,000 for single and joint tax return filers).

First-time Homebuyer Only
Yes. Buyer (AND spouse) must not have owned a principal residence for 3 years before closing.

Repayment
No repayment of the credit is required unless you sell or cease to use the residence as your principal residence within three years of your date of purchase. In that event the entire credit must be repaid.

Effective Date
Purchases (closings) on or after January 1, 2009 and on or before November 30, 2009.

CAUTION
Does not apply to purchases from descendants or ascendants.

Questions I have
Unmarried individuals in joint purchase? Both first-time requirement? Both income limitation? Each gets half of credit, or one gets all and one gets none?

What must I do?
See your Tax Advisor