Homebuyer Tax Credit

By now you’ve probably heard that the “homebuyer tax credit” has gotten a lot more attractive for potential homebuyers.  In February, the federal government approved this so-called “first-time homebuyer tax credit” to promote homeownership at a time when homebuilders were (and still are) struggling to part with their overflowing inventory.

While it’s unclear if this tax credit was actually designed for us consumers rather than the homebuilders, in can come in handy if you find a good deal on a piece of property that you actually want to keep for a few years.  Here’s how it works:

Effective for home purchases made between January 1, 2009 and December 1, 2009, you are entitled to receive a tax credit of up to $8,000, up from last year’s $7,500 limit.  However, the actual amount you receive is dependent on the purchase price of the home, as you can only receive up to 10 percent of the purchase price.

Homebuyer Tax Credit extended: Sign a contract by April 30, 2010, close by June 30, 2010.

For example, if you purchase a home for $60,000, you would only be entitled to a $6,000 tax credit.

It’s only good for the purchase of a principal residence, that is, a home you plan to actually reside in.  Condos, co-ops, and townhouses are also eligible.  Second homes and investment properties are not eligible for the homebuyer tax credit.

You are entitled to the full tax credit if your adjusted gross income is no more than $75,000 ($150,000 on a joint return); it then phases out above those caps.  You must also be considered a first-time homebuyer, meaning you (or your spouse) haven’t owned a principal residence in the three years prior to purchase.

Now here’s the cool part.  It no longer needs to be paid pack.  That’s right, if you retain your home for at least three years, the homebuyer tax credit does not need to be repaid.  This is a big change from the prior policy that required a portion of the tax credit to be paid back.  However, if you sell your home within three years of purchase, the full amount is recaptured at time of sale, so consider that when purchasing a home.

Another amazing aspect of the homebuyer tax credit is that it’s a dollar-for-dollar reduction in what the taxpayer owes, meaning if you owed $8,000 to the IRS, and you qualified for the full $8,000 tax credit, you’d owe the IRS nothing.

It’s also refundable, meaning the homebuyer tax credit can be claimed even if the homebuyer doesn’t have enough federal income tax to offset it.  So if you owe little or no taxes, you may receive a check for a portion or even all of the tax credit.

The homebuyer tax credit can even be used to cover down payment and closing costs in certain states, which I have mixed feelings about given the fact that I think homebuyers should have some skin in the game if they plan to purchase a home.  So there it is, be sure to speak with a legal professional to ensure you understand all the details of the tax credit before you sign anything, as it’s new and rules vary by state.

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