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First-Time Homebuyer Tax Credit

Up to $8,000 federal tax credit for first-time home buyers

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People who claimed the first-time homebuyer credit on their federal income tax return in 2008 will need to begin repaying that tax credit on their 2010 tax return. The homebuyer credit is still available until April 2011 for military personnel.

Repaying the First-Time Homebuyer Credit

The 2008 version of the homebuyer credit needs to be repaid in equal installments over 15 years. Unlike any other tax credit, the homebuyer credit must be repaid over 15 years. This pay-back feature applies only to homes purchased in 2008.

The homebuyer credit is repaid as an additional tax on your federal tax return for fifteen years, starting with your 2010 tax return. If you received the maximum $7,500 credit, this works out to annual repayments of $500 per year. You could think of this tax credit as an interest-free 15-year loan. The credit will also need to be repaid in full if the taxpayer sells the house within the fifteen-year repayment period.

The credit also needs to be repaid in full if within 36 months of buying the property, the home is no longer the taxpayer's primary residence. This provision applies to all versions of the homebuyer credit. The credit will be disallowed if a taxpayer sells the house before the end of the same year in which the house was purchased.

You will utilize Form 5405 to calculate your repayment of the homebuyer credit. The IRS advises, "If you are required to repay the credit, complete Parts III and IV of Form 5405. Attach the form to your Form 1040. Include the repayment on Form 1040, line 59, and check box c." (Publication 17, chapter 37.)

Summary of the First-Time Homebuyer Credit by Year

For 2008: up to $7,500, the credit is paid back over 15 years.

For Jan - Nov 2009: up to $8,000, the credit does not need to be paid back.

For Dec 2009 - April 2010: up to $8,000 for first-time buyers, the credit does not need to be paid back.

For Nov 7, 2009 - April 2010: up to $6,500 for "long-term residents" buying a new home, the credit does not need to be paid back.

Until April 30, 2011: homebuyer credit continues to be available for qualified members of the U.S. uniformed services.

Dollar Amounts of the Homebuyer Tax Credit

The tax credit is worth 10% of the purchase price of the home. For 2008, the maximum credit is $7,500 ($3,750 for married couples filing separate returns). The credit is also limited to the same $7,500 maximum for unmarried persons who purchase a residence together.

For 2009 and 2010, the maximum credit is $8,000 (or $4,000 for married couples filing separately).

Long-term residents purchasing a new home have a lower maximum credit of $6,500, or $3,250 for married couples filing separate returns.

Limit based on Maximum Purchase Price

No tax credit is allowed if the purchase price of the home exceeds $800,000. There's no phase-out or gradual reduction of the credit.

First-Time Homebuyers

For the purpose of this tax credit, a first-time homebuyer is defined as someone who has not owned a primary residence in the three-year period ending on the date of purchasing the home. Married couples are considered first-time buyers if neither spouse has owned a residence in the previous three years.

Long-Term Resident Homebuyers

People who already own a home can qualify for the tax credit if they buy another home. To qualify, individuals needs to have owned and lived in their residence for at least five consecutive years in the eight-year period that ends on the purchase date of the new property.

Extended Deadline for Qualifying Servicemembers

People serving in the U.S. military, intelligence community or Foreign Service on official extended duty outside of the U.S. have an additional year to qualify for the homebuyer credit.

Limited Time Period for Purchasing a Residence

The credit has a very limited life-span. Individuals will need to purchase a residence after April 9, 2008, and before May 1, 2010. Qualified servicemembers must purchase a residence before May 1, 2011.

What's a Primary Residence

A primary residence is a residence in which an individual lives most of the time. A primary residence can be a house, condominium, co-operative apartment, houseboat, or mobile home.

Because the tax credit is for people who purchase their primary residence, individuals may qualify for the tax credit even if they own a vacation home or rental property as long as those properties were not their primary residence for at least three years preceding the purchase of their new home.

Income Phase-out Range

The credit is phased out for individuals with modified adjusted gross income between $75,000 and $95,000. For married couples filing a joint return, the phase out range is $150,000 to $170,000. Effective Nov 6, 2009, the phase out ranges start at $125,000, or $225,000 for married couples.

To determine if the tax credit is reduced or eliminated by the income phase-out range, individuals will need to determine their modified adjusted gross income.

For the purposes of determining income eligibility for this credit, adjusted gross income is modified by adding back the foreign earned income exclusion; plus any excluded income from Guam, American Samoa, the Northern Mariana Islands, or Puerto Rico.

When to Claim the Credit

The credit is fully refundable, meaning taxpayers will be able to obtain an additional federal tax refund of up to $7,500 even if they have no other tax liabilities.

Taxpayers will be able to claim the credit on their 2008 tax return for homes purchased in 2008. For homes purchased in 2009, the IRS will allow the purchasers to file an amended 2008 return to claim the credit. For the 2009 tax credit to show up on the 2008 return, taxpayers will need to elect to treat the 2009 home purchase as if it were made on December 31, 2008. Guidance released by the IRS provides that taxpayers making this election are eligible for the higher $8,000 tax credit amount and do not need to repay the credit if they take their 2009 credit on their 2008 tax return. Similarly, for homes purchased in 2010, the credit can be taken either on a 2009 tax return or on the 2010 tax return.

Tax Form to Claim the First-Time Homebuyer Credit

Form 5405 (pdf, 3 pages)
Instructions for Form 5405 (pdf, 5 pages)

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