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First-Time Homebuyers Credit and how it may affect your current tax return.

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The First-Time Homebuyers Credit was a government initiative meant to increase the sale of homes in the United States.  The credit has been offered for tax years 2008, 2009, and 2010.  However there are some fundamental differences from year to year which may affect your current tax filing.

The Housing and Economic Recovery Act of 2008 provided a refundable tax credit for individuals who were qualified first-time homebuyers of a principal residence.

The initial credit for qualified buyers is equal to 10% of the purchase price of the principal residence. For 2008, the credit amount cannot exceed $7,500 ($3,750 for married individuals filing a separate return)…the credit applies to a principal residence purchased by the taxpayer after April 8, 2008, and on or before December 31, 2008…this one must be repaid over a 15-year period. As a result, the new tax credit works like an interest-free loan. You take the full credit on your 2008 return, and then repay the credit amount in equal payments over 15 years, with no interest charges…A “first-time homebuyer” is any individual (and spouse if married) who had no present ownership interest in a qualifying principal residence during the 3-year period ending on the date of purchase of the principal residence for which a first-time homebuyer credit is being claimed.

In 2009 the credit was extended and changed which is when it began to become confusing, because in 2009 there were two laws enacted that changed the face of this credit.  The American Recovery and Reinvestment Act of 2009 was the first to make changes.

  • Qualifying taxpayers who buy a home after December 31, 2008, and before December 1, 2009, can claim a first-time homebuyer credit of 10% of the home’s purchase price, up to $8,000 ($4,000 for married filing separately).
  • Qualified 2009 homebuyers do not have to repay the credit, provided the home remains their main home for 36 months after the purchase date.
  • Taxpayers who qualify for the 2009 credit can elect to claim the credit either on their 2008 tax return or on their 2009 tax return.

Later in 2009,…

The Worker, Homeownership, and Business Assistance Act of 2009 added special provisions for members of the armed forces and extended the First-time Homebuyer Credit deadline to include qualifying purchases made by taxpayers who enter into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010.

The changes made through the final act allowed long-time residents who owned and used the same principal residence for any 5 consecutive years of the last 8 years prior to purchasing  new principal residence to qualify for a tax credit of up to $6,500 when previously the credit was only allowed for “first time” homebuyers.  Some of the other additional changes were a  limit on the age of the qualifying taxpayer to 18+, an  increase the income limitation on the credit, and a requirement that the taxpayer  send proof of the purchase to the IRS with the tax return.

The Homebuyer Assistance and Improvement Act of 2010 further extended the closing date to before October 1, 2010, for taxpayers who enter into a binding written contract before May 1, 2010, to close on the purchase before July 1, 2010.

How can the First-Time Homebuyer Credit affect your current filing?  Unfortunately, if you took the credit in 2008 you will need to begin repayment.  The repayment amount of up to $500 will need to be included on your current tax filing for 2010 and on your next 14 years of taxes.  For those individuals who must start repaying their 2008 credit this will mean higher taxes and therefore lower refunds.  If you purchased a home in 2010 within the IRS issued dates for qualification and meet the requirements and have not already taken the credit in a previous year, you may be able to take the credit on your current return therefore increasing your refund.  For those who took the credit in any year it was offered and have disposed of, transferred ownership, or no longer use the residence as a main home, within the 36 months after purchase you will have to repay the entire credit in that year.

Sound complicated?  If you believe that you may qualify for the credit or are facing repayment we suggest you contact a tax professional.  A mistake on any one of these credits could be quite costly.

Source: (First-Time Homebuyer Credit 2008, 2009 & 2010)