First-Time Home Buyer Tax Credit

The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. The following questions and answers provide basic information about the tax credit. If you have more specific questions, I encourage you to consult a qualified tax advisor or legal professional about your unique situation.

In summary:

·    The tax credit is available for first-time home buyers only.

·    The maximum credit amount is $7,500.

·    The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009.

·    Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

·    The tax credit works like an interest-free loan and must be repaid over a 15-year period.

1.    Who is eligible to claim the $7,500 tax credit? First time home buyers (buyers who has not owned a principal residence during the three-year period prior to the purchase) purchasing any kind of home—new or resale—are eligible for the tax credit. The closing on a home purchase must have occurred on or after April 9, 2008 and before July 1, 2009.

2.    How do I claim the tax credit?  You claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests.

3.    What types of homes will qualify for the tax credit? Any home which is to be used as a principal residence and purchased by an eligible first-time home buyer will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes and houseboats. Also, a principal residence that is constructed by the home owner is eligible and is considered "purchased" on the date the owner first occupies the house. The date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.

4.    What is "modified adjusted gross income"? Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

5.    If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?  It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phase-out limits. There is no credit available for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.

6.    Does the credit amount differ based on tax filing status? No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.

7.    Is the tax credit is refundable. What does that mean? The credit is refundable which means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset.

8.    What is the difference between a tax credit and a tax deduction? 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.A tax deduction is subtracted from the amount of income that is taxed.

9.    Do you have to be a U.S. citizen to claim the tax credit? Not necessarily. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.

10.   How is the credit paid back to the government?  Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit 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 sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven. Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.