As we approach the uniquely American tradition of Thanksgiving, we have been handed an extension of the First Time Homebuyer Tax Credit that bears close examination. It is bigger and better than before, and it offers something for almost everyone.
First, it extends and enhances the credit for first-time buyers. And second, it expands the program for the first time to include those who own a home now and are relocating.
If you are a potential first-time buyer, the qualifications for the credit have changed:
● You still must buy your first home, and you can qualify for a direct tax credit of 10 percent of the home’s purchase price, up to a maximum of $8,000. But now you must have the home under contract by April 30, and you must close no later than July 1.
● Buying your “first home” means you have not owned any other principal residence for the past three years. It’s OK if you own rental property or a second residence, such as a house at the beach.
● Under the new rules, the price of the house you buy must not exceed $800,000 or the entire credit is lost. The previous rules imposed no limit on purchase price.
● Also new, the income limits have been significantly expanded to include more Americans.
You can now qualify for the full credit with single income up to $125,000 and married filing jointly income of up to $225,000. Beyond that income, the credit begins to phase out and is eliminated completely for those earning more than $145,000 and $245,000, respectively.
It’s important to know that the First Time Homebuyer Tax Credit is a “direct tax credit” and not a rebate or a grant. That matters because a tax credit is not considered to be income and is therefore not taxable. In contrast, the recent Cash for Clunkers rebates are considered income just as if you sold your used car to the dealer, and you would have to report those dollars on your tax return.
For most workers, getting a tax credit of $8,000 is roughly the equivalent of receiving a year-end bonus from your employer of nearly $12,000.
Because of the amount of fraud experienced with the prior program, the Internal Revenue Service now requires documentation. That means you’ll attach your closing statement to your tax return. And for the first time, you must be at least 18 to claim the credit. No more infant home buyers.
The three-year occupancy requirement remains unchanged. If you move or sell within the 36 months following purchase, you’ll be required to refund the entire amount of your credit to the government.
Next week, we will look at the new tax credit for current homeowners and see who qualifies.
John Adams is a broker and investor. He answers real estate questions on radio station WGKA (920 AM) every Saturday at noon. For more real estate information or to make a comment, visit www.money99.com.
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