The Homebuyers Tax Credit was created in 2008 to help prop up the the struggling economy. Real estate prices had crashed in most markets and the country was in the midst of what turned out to be a bad recession. First time home buyers in the years 2008, 2009, and 2010 were eligible for an $8,000 First-time Homebuyers Tax Credit.
What Is the Homebuyer Tax Credit?
Homebuyers who had a contract in place by April 30th with a closing date no later than September 30th were eligible to claim the $8,000 tax credit provided they had a modified adjusted gross income of up to $125,000 for single or $250,000 for couples. These income amounts were increased from the original rules of the tax credit.
The Obama administration originally extended the tax credit in November 2009. At that time, existing homeowners were included in the credit guidelines. Homeowners who were selling their homes could qualify for a tax credit of $6,500. Homes that cost more than $800,000 were not eligible for the tax credit. All claimants must be over the age of 18.
Who Should Take Advantage of the Homebuyers Tax Credit?
Tax credits are powerful because they reduce your tax bill on a one for one basis. An $8,000 tax credit reduces your tax bill by $8,000. A tax deduction only reduces your taxable income. So an $8,000 tax deduction at the 25% tax bracket would only reduce your tax bill by $2,000.
Like I said, tax credits are powerful! But that doesn’t mean you should buy a house just to get a tax credit. Buying a house is a huge commitment. A one-time $8,000 savings pales in comparison to the long-term commitment of making mortgage payments, paying for home-improvements, and taking care of related household expenses. One should only take advantage of the Homebuyer Tax credit if they were already planning on buying a home.
Is the Homebuyer Tax Credit Still Available?
Unfortunately, the Homebuyers Tax Credit is no longer available.
After the April 2010 extension deadline, many were hopeful that another extension would be issued to help new homebuyers. However, once the deadline had passed it became apparent no new extension was forthcoming.
One reason is because the housing market started to bounce back. Home purchases began surging in light of the tax credit and low mortgage rates. Sales exceeded what even the most seasoned analysts anticipated. Home prices have also gone up. In Match, the median price of a new home in the US rose 4.3%.
Another reason an extension wasn’t added was due to the government’s preoccupation with other issues, specifically the state of the government’s debt situation, foreclosures, and health care. Economists feel that the homebuyer tax credit and its subsequent extensions have done their job and brought the housing market back.
Will the Homebuyer Tax Credit Make a Comeback?
At this point, it doesn’t seem as if a homebuyer tax credit extension is on the horizon. However, while the original deadline has passed there are still some groups that remain eligible for the extension through 2011. These groups include active members of the Armed Forces and certain federal employees who are currently working outside of the US. These groups have another year to purchase a primary residence to qualify for the tax credit. They face deadlines of April 30, 2011 for entering into a sales contract with settlement of the purchase to be completed by June 30, 2011.
How to Claim the Credit If You’ve Met the Deadlines
Taxpayers have the option of claiming the credit on either their 2009 or 2010 income taxes. If you missed filing the credit for last year, you will need to get prepared to claim in for this year. Taxpayers must complete Form 5405, First Time Homebuyer Credit. Along with the completed form, the following documents must also be included to redeem proper credit:
Settlement Statement – a copy of the statement that shows the buyer/seller names and signatures, address of the property, sales price, and the purchase price.
Retail Contract – for mobile home purchases, a copy of the executed retail sales contract showing the property information, proper signatures, and purchase price and date is a suitable replacement for the Settlement Statement.
Certificate of Occupancy – for those with a newly constructed home purchase, a copy of the certificate of occupancy that shows the name of the owner, the address of the property, and the date of the certificate can be used in place of the Settlement Statement.
Do You Have to Repay the Homebuyer Tax Credit?
Not all the tax credits were created equal; in some cases, homeowners may be on the hook for repaying the tax credit. In 2008 the tax credit was a loan, in 2009 it was a true tax credit.
First Time Homebuyers in 2008
A plan to provide first time homebuyers with a tax credit in 2008 has been the source of great confusion. This tax credit amounted to 10% of the home’s purchase price or $7,500, whichever number was smaller. However, rather than being a true tax credit, this first time homebuyer tax credit was actually a loan. The government fully expects that you will pay back this tax credit over the course of 15 years. There is no interest on this loan, but if you bought your home between April 8, 2008 and December 31, 2008, you are required to begin repaying the tax credit with your 2010 taxes.
As you probably know, waiting until 2009 would have resulted in a much better deal: a true tax credit.
Homebuyer Tax Credits in 2009 and 2010
First-time homebuyers, and those in existing homes that met certain conditions, were able to take advantage of different tax credits in 2009 and 2010. Buying a home on January 1, 2009 through April 30, 2010 created an opportunity to get a tax credit that would not have to be paid. (The settlement date to meet was September 30, 2010.)
You can claim your tax credit on your 2010 taxes. You might have to pay it back, though, if you do not maintain the home as a primary residence for 36 months. So, if you move out, you become responsible for repaying the government for your tax credit. There are some exclusions to this, though:
- Military, intelligence or foreign services personnel who are required to live in government quarters or are moved to a duty station more than 50 miles away.
- Home damage that is involuntarily — but you have to buy a new home within two years.
- Home sold to someone who is unrelated to you. You have to repay a portion of the tax credit, up to the gain on the home’s sale.
- Death of the homeowner within 36 months. However, a surviving spouse will have to pay half the credit is he or she moves out.
- In divorce, the spouse who retains the home is responsible for the credit repayment if he or she moves out within 36 months.
It is worth noting that these exclusions apply to the repayment of the 2008 tax credit as well.
Filing for a Homebuyer Tax Credit
For those taking the homebuyer tax credit, Form 5405 will need to be filed along with your tax return. For those repaying the 2008 credit, it is necessary to make sure you are filing the revised 2010 version of Form 5405. When claiming the credit for 2009 or 2010, you will need to supply additional documentation with your tax return, including a copy of your settlement statement (HUD-1 form). Other documentation may needed, depending on your situation, including Form 1098, tax records, insurance records or copies of signatures from your purchase contract. Consult with a tax professional to see what documentation you might need. And realize that, due to the documentation requirement, you cannot e-file your tax return if you are taking this credit. You can get more information from IRS.gov.