Smart401k Blog

Recently, I had a friend over to watch some football.  Seeing as KU was down considerably, conversation moved away from football to what was going on in our lives.  I was surprised to hear that my friend, who goes by Bear (he’s big and burly like a bear), was looking into buying a home and taking advantage of the First-time home buyer tax credit.  I knew about the program, but he brought up that the new stipulations passed recently, which I didn’t know about.  I assumed the extension passed a couple weeks ago was just that – an extension, but in fact a few of the rules were changed.  As he explained to me, since I bought my house within the last five years, I was eligible for the credit.  I wasn’t 100% sure if Bear was right, so I did some research and found out that even those who currently own a home could be eligible for a tax credit called the Move-up/Repeat Home Buyer Tax Credit but it wasn’t exactly how Bear explained it to me. 

Here is what I found out and what you need to know if you’re thinking of buying a home in the next 6 months:

Credit:

The tax credit is equal to 10% of the home’s purchase price up to a maximum of $6,500.  For qualifying purchases, taxpayers have the option of claiming the credit on either their 2008 (if purchased in 2009), 2009 (if purchased in 2009 or 2010) or 2010 tax return.  Depending on your income in both years and if you are nearing the new income limitations, it could be to your advantage one way or the other.  For example, instead of receiving a partial credit since you exceeded the income limitations (we will discuss this further below) you could potentially receive the entire credit if you were below the income limitation last year.

Extension:

The new tax credit only applies to homes purchased after November 6^th, 2009 and ends July 1, 2010 (a buyer must have a contract in place before May 1, 2010).  For someone building a home, the date of first occupancy must be on or before April 30^th 2010, or by June 30^th, 2010 as long as a binding contract is in place.

New Qualifications:

You don’t have to be a first time home owner to take advantage of the tax credit anymore.  To be eligible, you must have lived in the same principal residence for five-consecutive years over the past eight-years to qualify for the credit.  The principal residence is defined as where you spend most of your time (work doesn’t count), where your family resides, or the address that bills and other correspondence is sent to.

New Limitations:

With the extension came new limitations.  To receive the credit you cannot purchase a home worth more than $800,000.  I am not sure why $800,000, but the IRS must have their reasons.

There are also new income limits in place.  For single filers, the credit now phases out between $125,000 and $145,000 of modified adjusted gross income (MAGI); for married couples, the range is $225,000 to $245,000.  I would recommend speaking to a tax advisor to find out what your MAGI is since it will depend on your adjusted gross income (total income earned minus certain deductions) plus other income sources.  If you exceed the MAGI limitation you might still be eligible for a partial tax credit.  (See question #7 for further details on how to calculate partial credits.)

Tax Season:

To receive the credit through a qualified purchase, all you need to do is claim the tax credit on your federal income tax return.  You will need to fill out IRS Forms 5405 and 1040 to apply the credit.  No other applications are required, and no pre-approval is necessary.  Just be sure when you fill out the forms that you qualify for the credit.

For some people the tax credit will be refundable.  This means that someone could get cash back if they have little or no federal income tax liability to offset.  For example, if you had a tax withholding of $4,000 for the year but had a tax liability of $5,000 you would typically owe $1,000.  However, if you qualified for the home buyer credit of $6,500 you would actually end up receiving a check for $5,500 ($6,500 minus the $1,000 owed).

So in the end, my friend Bear was wrong in thinking that anyone buying a house within the last 5 years would receive the credit.  Unfortunately, I wasn’t eligible for the credit.  First, I haven’t lived in my home for more than five years and the discount is for people buying homes instead of just for those currently owning one.  Hopefully, if you are in the process of buying a home or know someone looking into buying a home, this will give you something to talk about the next time your football team is getting creamed.

As always, if you have any questions please let me know.  I must also throw in that we are not tax advisors, so you may want to speak with one if you are looking to take advantage of the Move-up/Repeat Home Buyer Tax Credit.

Jeff Studebaker, Investment Advisor

This entry was posted on Wednesday, December 2nd, 2009 at 2:31 pm and is filed under Adviser Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.