Who Qualifies for the $7500 Tax Credit?
There has been a lot of interest and plenty of questions regarding the $7500 Tax Credit announced in the Housing and Economic Recovery Act. We would like to share the following article from the Carpenter Realtors Website which answers some of the most frequently asked questions.
$7,500 Tax Credit Available to 1st-Time Home Buyers
On Tuesday, August 5, 2008, the President signed the Housing and Economic Recovery Act of 2008 authorizing a $7,500 tax credit for qualified first-time home buyers purchasing a home on or after April 9, 2008 and before July 1, 2009. The following eleven questions and answers (FAQ’s) are designed to provide you with general guidance regarding the segment of the Act that deals with the new tax credit. This information is not intended to provide you with legal or tax advice. You should consult your attorney or tax advisor for a full understanding of the new law.
The Housing and Economic Recovery Act of 2008 First-Time Home Buyer Tax Credit
The Eleven Frequently Asked Questions (FAQ’s) Q: Who is eligible to claim the $7,500 tax credit?
A: First-Time home buyers purchasing any type of owner-occupied home – new or resale - are eligible for the “tax credit.” To qualify, a home must be purchased on or after April 9, 2008 and before July 1, 2009. The purchase date is considered the closing date.
The taxpayer's “Modified Adjusted Gross Income” (MAGI) is limited to $75,000 for single taxpayers and $150,000 for married taxpayers. There are some partial tax credits available if the MAGI exceeds the limits. (See #6)
Q: What is a tax credit? A: A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes, and who receives a $7,500 tax credit, would owe nothing to the IRS.
If the taxpayer owes $1,000 in federal income taxes and uses the new tax credit, they would receive a $6,500 refund. Really!
Q: What is the definition of a “First-time Home Buyer? A: The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. If one does not qualify, then the married couple does not qualify.
Q: What type of home qualifies? A: Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes and attached homes like condos and townhomes.
Q. If the home is modestly priced, is the tax credit still $7,500? A: Generally, for home buyers purchasing a home priced less than $75,000, the tax credit will equal 10% of the purchase price. Therefore, a first-time home buyer purchasing a home for $65,000 would receive a $6,500 tax credit.
Q: What is “Modified Adjusted Gross Income” (MAGI)? A: “Modified Adjusted Gross Income” (MAGI) is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income”. On IRS Form 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040EZ, AGI appears on line 4.
After you have the AGI, add certain amounts such as foreign income, foreign-housing deductions, student loan deductions, IRA contributions deductions and deductions for higher education costs. Questions about the taxpayer’s MAGI should be directed to your tax preparer, CPA or attorney.
Q: If the Modified Adjusted Gross Income (MAGI) is above the limit, do I qualify for any tax credit? A: Maybe. It depends on your income. Partial credits of less than the $7,500 are available for some taxpayers whose MAGI exceeds the phase-out limits. The credit becomes totally unavailable for individual taxpayers with a MAGI of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
As an example of the “phase-out”: Assume that a married couple has a MAGI of $160,000 ($10,000 above the $150,000 limit). Dividing the $10,000 overage by $20,000 ($20,000 is the set number for this calculation single or married taxpayer(s)) equals 0.5. When you subtract the 0.5 from 1, that gives you 0.5. To determine the amount of partial tax credit, multiply $7,500 by 0.5 and you have $3,750. That’s the partial tax credit allowed.
Q: The tax credit is “refundable.” What does that mean? A: The fact that the tax credit is “refundable” means that the home buyer’s credit can be claimed even if the taxpayer has little or no federal income tax liability to offset the tax credit. Typically, this involves the government sending the taxpayer a refund check for a portion or even all of the amount of the refundable tax credit. (See #2 above). Qualifying to buy a house with little or no federal taxable income will be rare.
Q: Do I have to repay the tax credit? A: YES. The tax credit must be repaid. Home buyers will be required to pay the credit back to the government, interest free, over a period of 15 years or when they sell the house, providing there is adequate capital gain from the sale. A home buyer claiming the $7,500 credit would repay the credit at $500 per year through their annual federal tax return. The home buyer does not have to begin making those repayments until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner re-sold the home during the 15th year, then the remaining credit amount would be due from the profit (capital gain) on the home sale. If there was insufficient profit (gain), the remaining credit payback would be forgiven.
Q: If I am qualified for the tax credit and buy a home in early 2009 (prior to April 15, 2009), can I apply the tax credit against my 2008 tax return? Against my 2009 tax return? A: Yes or Yes. You may “elect” which year you take your tax credit.
Q: What paperwork is required prior to or at the Closing? A: None. At this time, the paperwork required will be completed by the taxpayer or their tax preparer for their tax return filing. The purchase must be closed within the April 9, 2008 to July 1, 2009 timeline.
NOTE OF DISCLAIMER:
Consult your Attorney, CPA, and/or Tax Preparer for the legal or tax impact and consequences of The First-time Home Buyer Tax Credit of the Housing and Economic Recovery Act of 2008.
Carpenter Company, Inc. is providing this information for general guidance only. This information does not constitute the provision of legal advice, tax advice, or professional consulting of any kind. Before making any decision or taking any action on this information, you should consult a qualified professional advisor. This information is provided “as is” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied.
Much of this information and its subsequent interpretation was provided as a service to their members by the National Association of REALTORS® (NAR) and the National Home Builders Association (NHBA) and was used in the creation this document.