Tax Credit to Aid First-Time Homebuyers; Must Be Repaid Over 15 Years
WASHINGTON — First-time homebuyers should begin planning now to take
advantage of a new tax credit included in the recently enacted Housing and
Economic Recovery Act of 2008.
Available for a limited time only, the credit:
- Applies to home purchases after April 8, 2008, and before July 1, 2009.
- Reduces a taxpayer’s tax bill or increases his or her refund, dollar for
dollar. - Is fully refundable, meaning that the credit will be paid out to eligible
taxpayers, even if they owe no tax or the credit is more than the tax that
they owe.
However, the credit operates much like an interest-free loan, because it must
be repaid over a 15-year period. So, for example, an eligible taxpayer who buys
a home today and properly claims the maximum available credit of $7,500 on his
or her 2008 federal income tax return must begin repaying the credit by
including one-fifteenth of this amount, or $500, as an additional tax on his or
her 2010 return.
Eligible taxpayers will claim the credit on new IRS Form 5405. This form,
along with further instructions on claiming the first-time homebuyer credit,
will be included in 2008 tax forms and instructions and be available later this
year on IRS.gov, the IRS Web site.
If you bought a home recently, or are considering buying one, the following
questions and answers may help you determine whether you qualify for the credit.
Q. Which home purchases qualify for the first-time homebuyer
credit?
A. Only the purchase of a main home located in the United States qualifies
and only for a limited time. Vacation homes and rental property are not
eligible. You must buy the home after April 8, 2008, and before July 1, 2009.
For a home that you construct, the purchase date is the first date you occupy
the home.
Taxpayers who owned a main home at any time during the three years prior to
the date of purchase are not eligible for the credit. This means that first-time
homebuyers and those who have not owned a home in the three years prior to a
purchase can qualify for the credit.
If you make an eligible purchase in 2008, you claim the first-time homebuyer
credit on your 2008 tax return. For an eligible purchase in 2009, you can choose
to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.
Q. How much is the credit?
A. The credit is 10 percent of the purchase price of the home, with a maximum
available credit of $7,500 for either a single taxpayer or a married couple
filing jointly. The limit is $3,750 for a married person filing a separate
return. In most cases, the full credit will be available for homes costing
$75,000 or more. Whatever the size of the credit a taxpayer receives, the credit
must be repaid over a 15-year period.
Q. Are there income limits?
A. Yes. The credit is reduced or eliminated for higher-income taxpayers.
The credit is phased out based on your modified adjusted gross income (MAGI).
MAGI is your adjusted gross income plus various amounts excluded from income—for
example, certain foreign income. For a married couple filing a joint return, the
phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out
range is $75,000 to $95,000.
This means the full credit is available for married couples filing a joint
return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is
$75,000 or less.
Q. Who cannot take the credit?
A. If any of the following describe you, you cannot take the credit, even if
you buy a main home:
- Your income exceeds the phase-out range. This means joint filers with MAGI
of $170,000 and above and other taxpayers with MAGI of $95,000 and above. - You buy your home from a close relative. This includes your spouse,
parent, grandparent, child or grandchild. - You stop using your home as your main home.
- You sell your home before the end of the year.
- You are a nonresident alien.
- You are, or were, eligible to claim the District of Columbia first-time
homebuyer credit for any taxable year. - Your home financing comes from tax-exempt mortgage revenue bonds.
- You owned another main home at any time during the three years prior to
the date of purchase. For example, if you bought a home on July 1, 2008, you
cannot take the credit for that home if you owned, or had an ownership
interest in, another main home at any time from July 2, 2005, through July 1,
2008.
Q. How and when is the credit repaid?
A. The first-time homebuyer credit is similar to a 15-year interest-free
loan. Normally, it is repaid in 15 equal annual installments beginning
with the second tax year after the year the credit is claimed. The repayment
amount is included as an additional tax on the taxpayer’s income tax return for
that year. For example, if you properly claim a $7,500 first-time
homebuyer credit on your 2008 return, you will begin paying it back on your 2010
tax return. Normally, $500 will be due each year from 2010 to 2024.
You may need to adjust your withholding or make quarterly estimated tax
payments to ensure you are not under-withheld.
However, some exceptions apply to the repayment rule. They include:
- If you die, any remaining annual installments are not due. If you filed a
joint return and then you die, your surviving spouse would be required to
repay his or her half of the remaining repayment amount. - If you stop using the home as your main home, all remaining annual
installments become due on the return for the year that happens. This includes
situations where the main home becomes a vacation home or is converted to
business or rental property. There are special rules for involuntary
conversions. Taxpayers are urged to consult a professional to determine
the tax consequences of an involuntary conversion. - If you sell your home, all remaining annual installments become due on the
return for the year of sale. The repayment is limited to the amount of gain on
the sale, if the home is sold to an unrelated taxpayer. If there is no gain or
if there is a loss on the sale, the remaining annual installments may be
reduced or even eliminated. Taxpayers are urged to consult a professional to
determine the tax consequences of a sale. - If you transfer your home to your spouse, or, as part of a divorce
settlement, to your former spouse, that person is responsible for making all
subsequent installment payments.
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