Update on Homebuyer’s Credits
Dear Client & Friends:
On November 6, the President signed into law H.R. 3548, the ''Worker,
Homeownership, and Business Assistance Act of 2009.'' The new law extends and
generally liberalizes the tax credit for first-time homebuyers, making it a much
more flexible tax-saving tool. It also includes some crackdowns designed to
prevent abuse of the credit. These important changes could it make it easier for
you or someone in your family to buy a home. And because the changes generally
aid buyers and aim to improve residential real estate markets nationwide, they
also could make it easier for you or someone in your family to sell a home. This
Client Letter fills you in on the details you need to know about the first-time
Homebuyer credit basics. Before the new law was enacted, the homebuyer
credit was only available for qualifying first-time home purchases after April
8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is
$8,000 ($4,000 for a married individual filing separately) or 10% of the
residence's purchase price, whichever is less. Only the purchase of a main home
located in the U.S. qualifies. Vacation homes and rental properties are not
eligible. The homebuyer credit reduces one's tax liability on a
dollar-for-dollar basis, and if the credit is more than the tax you owe, the
difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008,
the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person
disposes of the home (or stops using it as a principal residence) within 36
months from the date of purchase
Before the new law, the first-time homebuyer credit phased out for individual
taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000
($150,000 and $170,000 for joint filers) for the year of purchase.
Your guide to the revised homebuyer credit. The new law makes four
important changes to the homebuyer credit:
(1) New lease on life for the homebuyer credit. The homebuyer credit
is extended to apply to a principal residence bought before May 1, 2010. The
homebuyer credit also applies to a principal residence bought before July 1,
2010 by a person who enters into a written binding contract before May 1, 2010,
to close on the purchase of the principal residence before July 1, 2010. In
general, a home is considered bought for credit purposes when the closing takes
place. So the extra two-months (May and June of 2010) helps buyers who find a
home they like but can't close on it before May 1, 2010. They can go to contract
on the home before May 1, 2010, close on it before July 1, 2010, and get the
homebuyer credit (if they otherwise qualify). Note that certain service members
on qualified official extended duty service outside of the U.S. get an extra
year to buy a qualifying home and get the credit; they also can avoid the
recapture rules under certain circumstances.
(2) The homebuyer credit may be claimed by existing homeowners who are
“long-time residents.” For purchases after November 6, 2009, you can claim
the homebuyer credit if you (and, if married, your spouse) maintained the same
principal residence for any 5-consecutive year period during the 8-years ending
on the date that you buy the subsequent principal residence. For example, if you
and your spouse are empty nesters who have lived in your suburban home for the
past ten years, you are potentially eligible for the credit if you “move down”
and buy a smaller townhome. There's no requirement for your current home to be
sold in order to qualify for a homebuyer credit on the replacement principal
residence. Thus, the replacement residence can be bought to beat the new
deadlines (explained above) before the old home is sold. For that matter, you
can hold on to your prior principal residence in the hope of achieving a better
selling price later on.
The maximum allowable homebuyer credit for qualifying existing homeowners is
$6,500 ($3,250 for a married individual filing separately), or 10% of the
purchase price of the subsequent principal residence, whichever is less.
(3) The homebuyer credit is available to higher income taxpayers. For
purchases after November 6, 2009, the homebuyer credit phases out over much
higher modified AGI levels, making the credit available to a much bigger pool of
buyers. For individuals, the phaseout range is between $125,000 and $145,000,
and for those filing a joint return, it's between $225,000 and $245,000.
(4) There's a new home-price limit for the homebuyer credit. For
purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home
if its purchase price exceeds $800,000. It's important to note that there is no
phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even
a single dollar will cause the loss of the entire credit.
The new purchase price limitation applies whether you are buying a first-time
principal residence or are a qualifying existing homeowner purchasing a
replacement principal residence.
Other homebuyer credit changes. The new law includes a number of new
anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even
though they don't qualify for it. The most important of these are as follows:
... Beginning with the 2010 tax
return, the homebuyer credit can't be claimed unless the taxpayer attaches to
the return a properly executed copy of the settlement statement used to complete
the purchase of the qualifying residence.
purchases after Nov. 6, 2009, the homebuyer credit can't be claimed unless the
taxpayer has attained 18 years of age as of the date of purchase (a married
person is treated as meeting the age requirement if he or his spouse meets the
purchases after Nov. 6, 2009, the homebuyer credit can't be claimed by a
taxpayer if he can be claimed as a dependent by another taxpayer for the tax
year of purchase. It also can't be claimed for a home bought from a person
related to the buyer or the spouse of the buyer, if married.
Beginning with 2009 returns, the new law makes it easier for the IRS to go after
questionable homebuyer credit claims without initiating a full-scale audit.
What hasn't changed. The tax law
still gives you the extraordinary opportunity to get your hands on homebuyer
credit cash without waiting to file your tax return for the year in which you
buy the qualifying principal residence. Thus, if you buy a qualifying principal
residence in 2009 you can treat the purchase as having taken place this past
December 31, file an amended return for 2008 claiming the credit for that year,
and get your homebuyer credit cash relatively quickly via a tax refund.
Similarly, you can treat a qualifying principal residence bought in 2010 (before
the new deadlines) as having taken place on December 31, 2009, and file an
original or amended return for 2009 claiming the credit for that year.
What also hasn't changed is the need for getting expert tax advice in
negotiating through the twists and turns of the new beefed-up homebuyer credit.
Please call us today for details on how the homebuyer credit can help you or
your family members.
Please call us at (510) 797-8661 if
you have any questions or comments.