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2009 First Time Buyer Tax Credit
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Frequently Asked Questions

Information written by Linda Goold, Tax Counsel for the National Association of Realtors (NAR)

What's this new homebuyer tax incentive for 2009?

The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is
eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for
the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost.
Thus, if an individual purchased a home for $75,000, the credit would be $7500.
It is
available for the purchase of a principal residence on or after January 1, 2009 and
before December 1, 2009
.

Who is eligible?

Only first-time home buyers are eligible.
A person is considered a first-time buyer if
he/she has not had any ownership interest in a home in the three years previous to
the day of the 2009 purchase.

How does a tax credit work?

Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an
individual’s income tax return. Thus, a qualified purchaser would figure out all the income
items and exemptions and make all the calculations required to figure out his/her total tax due.
Then, once the total tax owed has been computed, tax credits are applied to reduce the total
tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500,
an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500)
So what happens if the purchaser is eligible for an $8000 credit but their entire income tax
liability for the year is only $6000?

This tax credit is what's called "refundable" credit. Thus, if the eligible purchaser's total tax
liability was $6000, the IRS would send the purchaser a check for $2000. The refundable
amount is the difference between $8000 credit amount and the amount of tax liability. ($8000
- $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS
prepares each year.
How does withholding affect my tax credit and my refund?

A few examples are provided at the end of this document. There are several steps in this
calculation, but most income tax software programs are equipped to make that determination.

Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing
his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are
eligible for the credit if their income is no more than $75,000. Married couples who file a Joint
return may have income of no more than $150,000.

How is my "income" determined?
For most individuals, income is defined and calculated in the same manner as their Adjusted
Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries,
interest and dividends, pension and retirement earnings, rental income and a host of other
elements. AGI is the final number that appears on the bottom line of the front page of an IRS
Form 1040.

What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing allowances while working
outside the US. Their income will be adjusted to reflect those items to measure Modified
Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the
benefit of the credit?
Not always. The credit phases-out between $75,000 - $95,000 for singles and $150,000 -
$170,000 for married filing joint. The closer a buyer comes to the maximum phase-out
amount, the smaller the credit will be. The law provides a formula to gradually withdraw the
credit. Thus, the credit will disappear after an individual's income reaches $95,000 (single
return) or $170,000 (joint return).

For example, if a married couple had income of $165,000, their credit would be reduced by
75% as shown:
Couples income $165,000
Income limit 150,000
Excess income $15,000

The excess income amount ($15,000 in this example) is used to form a fraction. The
numerator of the fraction is the excess income amount ($15,000). The denominator is
$20,000 (specified by the statute).

In this example, the disallowed portion of the credit is 75% of $8000, or $6000 ($15,000
/$20,000 = 75% x $8000 = $6000). Stated another way, only 25% of the credit amount would
be allowed. In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

What's the definition of "principal residence?"
Generally, a principal residence is the home where an individual spends most of his/her time
(generally defined as more than 50%). It is also defined as "owner-occupied" housing. The
term includes single-family detached housing, condos or co-ops, townhouses or any similar
type of new or existing dwelling. Even some houseboats or manufactured homes count as
principal residences.

Are there restrictions on the location of the property?
Yes. The home must be located in the United States. Property located outside the US is not
eligible for the credit.

Are there restrictions related to the financing for the mortgage on the property?
In 2009, most financing arrangements are acceptable and will not affect eligibility for the
credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers
were ineligible for the $7500 credit if the financing was obtained by means of mortgage
revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-
eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing
agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

Do I have to repay the 2009 tax credit?
NO. There is no repayment for 2009 tax credits. Unless they sell within 3 years of closing
using this credit.

Do 2008 purchasers still have to repay their tax credit?
YES. The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who
claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010
tax return.

How do I apply for the credit?
There is no pre-purchase authorization, application or similar approval process. All eligible
purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be
reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at
www.irs.gov.

So I can't use the credit amount as part of my down payment?
No. Congress tried hard to devise a mechanism that would make the funds available for
closing costs, but found that pre-funding would require cumbersome processes that would, in
effect, bring the IRS into the purchase and settlement phase of the transaction.

So there's no way to get any cash flow benefits before I file my tax return?
Yes, there is. Any first-time homebuyer who believe they are eligible for all or part of the credit
can modify their income tax withholding (through their employers) or adjust their quarterly
estimated tax payments. Individuals subject to income tax withholding would get an IRS Form
W-4 from their employer, follow the instructions on the schedules provided and give the
completed Form W-4 back to the employer. In many cases their withholding would decrease
and their take-home pay would increase. Those who make estimated tax payments would
make similar adjustments.

What if I purchase later this year but can’t get to settlement before December 1?
The credit is available for purchases before December 1, 2009. A home is considered as
“purchased” when all events have occurred that transfer the title from the seller to the new
purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible
for the credit.

I haven't even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until
next year to get the benefit of the credit?
You'll have a helpful choice that might speed up the process. Eligible homebuyers who make
their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it
had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return
that is due on April 15, 2009. They actually have three filing options.
If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit
on the 2008 return due on April 15.
They can extend their 2008 income-tax filing until as late as October 15, 2009. (The IRS
grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for
instructions on how to obtain an extension.)
If they have filed their 2008 return before they purchase the home, they may file an amended
2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)
Of course, 2009 purchasers will always have the option of claiming the credit for the 2009
purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.

I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a
$7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just
a $7500 credit?
No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the
$7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form
1040X) for the 2008 tax year. This amended return will enable them to obtain the additional
$500 credit amount.

If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit
just as the 2008 credits are repaid?
No. Congress anticipated this confusion and has made specific provision so that there would
be no repayment of 2009 credits that are claimed on 2008 returns.

I made an eligible purchase of a principal residence in May 2008 and claimed the
$7500 credit on my 2008 tax return. My brother, who has never owned a home,
wishes to purchase a partial interest in the home this spring and move in. Will he
qualify for the $8000 credit, as well?
No. Any purchase of a principal residence (or interest in a principal residence) from a related
party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since
you and your brother are related in this way, he cannot qualify for the credit on any portion of
the home that he purchases from you, even if he is a first-time homebuyer.

I live in the District of Columbia. If I qualify as a first-time homebuyer, can I use both
the $5000 DC credit and the $8000 credit?
No; double dipping is not allowed. You would be eligible for only the $8000 credit. This will be
an advantage because of the higher credit amount, plus the eligibility requirements for the
$8000 credit are somewhat more easily satisfied than the DC credit.

I know there is no repayment requirement for the $8000 credit. Will I ever have to
repay any of the credit back to the government?
One situation does require a recapture payment back to the government. If you claim the
credit but then sell the property within 3 years of the date of purchase, you are required to
pay back the full amount of any credit, including any refund you received from it. A few
exceptions apply. (See below, #24). Note that this same 3-year recapture rule applies, as well,
to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.

What if I die or get divorced or my property is ruined in a natural disaster within the
3 years?
The repayment rules are eased for many circumstances. If the homeowner who used the
credit dies within the first three years of ownership, there is no recapture. Special rules make
adjustments for people who sell homes as part of a divorce settlement, as well. Similarly,
adjustments are made in the case of a home that is part of an involuntary conversion
(property is destroyed in a natural disaster or subject to condemnation by eminent domain by
an authorized agency) within the first three years.

I have a home under construction. Am I eligible for the credit?
Yes, so long as you actually occupy the home before December 1, 2009.
WITHHOLDING EXAMPLES: Note: The impact of estimated tax payments would be the same.

EXAMPLES:

Situation 1:
Sally plans her withholding so that her withholding is as close as possible to what
she anticipates as her income tax liability for the year. When she fills out her 1040, her liability
is $6000. She has had $6000 withheld from her paycheck. She also qualifies for the $8000
homebuyer credit.

Result: Sally's withholding satisfies her tax liability and reduces it to zero. She will receive a
refund of the full $8000.

Situation 2: Nick and Nora file a joint return. Nick is self- employed and makes estimated
payments; Nora has taxes withheld from her salary. When they compute their taxes, their
combined withholding and estimated tax payments are $11,000. Their income tax liability is
$9800. They also qualified as first-time homebuyers and are eligible for the $8000 refundable
tax credit.

Result: Ordinarily, their combined estimated tax payments and withholding would make them
eligible for a refund of $1200 ($11,000 - $9800 = $1200). Because they are eligible for the
refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund +
$8000 refundable tax redit = $9200)

Situation 3: Cesar and LuzMaria both have income taxes withheld from their salaries and file
a joint return. When they file their income tax return, their combined withholding is $5000.
However, their total tax liability is $7200, generating an additional income tax liability of $2200
($7200 - $5000). They also qualify for the $8000 first-time homebuyer tax credit.

Result: Cesar and LuzMaria have been under-withheld by $2200. Ordinarily, they would be
required to pay the additional $2200 they owe (plus any applicable interest and penalties).
Because they are eligible for the refundable homebuyer tax credit, the credit will cover the
$2200 additional liability. In addition, they will receive an income tax refund of $5800 ($8000 -
$2200 = $5800). If they owed penalties and/or interest, that amount would reduce the refund.
The tax credit is available to buyers who haven't owned a home in the 3 years prior to
purchase date.

The tax credit does not have to be repaid. (See FAQ Below for exceptions)

The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of
$8,000.

The credit is available for homes purchased on or after January 1, 2009 and before
December 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.
Download the First Time Home Buyer Tax Credit Form 5405 from links at the bottom of
this page.