New Tax Credit Now Available for Home Buyers

As part of the new economic stimulus plan as passed on February 13, 2009, Congress has created a new federal tax credit to provide an incentive for first-time home buyers. This legislation is a further positive step to help stabilize the current housing market and make the dream of home ownership more attainable for many Americans.

A tax credit of $8,000 will be available for first-
time home buyers who purchase a principal residence through December 1, 2009. The provision is retroactive to purchases made on or after January 1, 2009.
This new tax credit replaces the previous $7,500 first-time home buyer tax credit created by the Housing and Economic Recovery Act of 2008.

-Who qualifies for the "new" tax credit?
First-time buyers purchasing a principal residence are eligible in addition to any taxpayer who has not owned a home during the three years prior to the date of purchase. The credit is subject to certain income restrictions.

-Are there income restrictions?
Yes. The income restriction is based on the tax filing status of the purchaser's tax return. Individuals with a "single" Form 1040 filing status are eligible for the credit if their adjusted gross income is no more than $75,000. Individuals who file a joint return may have income of no more than $150,000.

-Is the amount of the credit tied to the price of the home?
Yes. The credit is for 10 percent of the cost of the home, up to a limit of $8,000.
What's the definition of "principal residence?"
Generally, a principal residence is the home where an individual spends most of his/her time. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of dwelling.

-Are there restrictions on the location of the property?
Yes. Eligible property must be located in the United States. Property outside the U.S. is not eligible for the credit.

-What is different from the prior credit?
Unlike the prior credit (which was structured like a 15-year interest-free loan), it is a true tax credit because the money is not required to be paid back (unless the home is sold within three years).

-How do I apply for the credit?
There is no application or approval process. Eligible purchasers will claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise.

-Can I use the credit amount as part of my down payment?
No. Presently, there is no mechanism available for claiming the credit any earlier than the 2009 tax return that will be filed in 2010. Congress tried to devise a mechanism that would allow pre-funding of the credit, 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.

-Is there any way to get cash flow benefits before I file my 2009 tax return?
Any first-time home buyers who believe they would be eligible for all or part of the credit would be allowed to make adjustments to their income tax withholding (through their employers) or to 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, the take-home pay would increase.

Source: Potomac Partners, Washington D.C.