National Association of Realtors November , 2009

Bringing the Dream of Homeownership  Within Reach  

As part of its plan to stimulate the U.S. housing market and address the economic challenges facing our nation, Congress has passed new legislation that:

Extends the First-Time Home Buyer Tax Credit of up to $8,000 to first-time home buyers until April 30, 2010.

Expands the credit to grant up to $6,500 credit to current home owners purchasing a new or existing home between November 7, 2009 and April 30, 2010.

Who Qualifies for the Extended Credit?

First-time home buyers who purchase homes between November 7, 2009 and April 30, 2010.

Current home owners purchasing a home between November 7, 2009 and April 30, 2010, who have used the home being sold or vacated as a principal residence for five consecutive years within the last eight.

To qualify as a “first-time home buyer” the purchaser or his/her spouse may not have owned a residence during the three years prior to the purchase.

Which Properties Are Eligible?

The Extended Home Buyer Tax Credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops.

How Much Is Available?

The maximum allowable credit for first-time home buyers is $8,000.

The maximum allowable credit for current homeowners is $6,500.

How is a Buyer's Credit Amount Determined?

Each home buyer’s tax credit is determined by tow additional factors:

The price of the home.

The buyer's income.

Price

Under the Extended Home Buyer Tax Credit, credit may only be awarded on homes purchased for $800,000 or less.

Buyer Income

Under the Extended Home Buyer Tax Credit, which is effective on November 7, 2009,  single buyers with incomes up to $125,000 and married couples with incomes up to $225,000—may receive the maximum tax credit.

These income limits have changed from the 2009 First-Time Home Buyer Tax Credit limits. If you or your client purchased a home between January 1, 2009 and November 6, 2009, please see 2009 First-Time Home Buyer Tax Credit below.

If the Buyer(s)’ Income Exceeds These Limits, Can He/She Still Get a Credit?

Yes, some buyers may still be eligible for the credit.

The credit decreases for buyers who earn between $125,000 and $145,000 for single buyers and between $225,000 and $245,000 for home buyers filing jointly. The amount of the tax credit decreases as his/her income approaches the maximum limit. Home buyers earning more than the maximum qualifying income—over $145,000 for singles and over $245,000 for couples are not eligible for the credit.

Can a Buyer Still Qualify If He/She Closes After April 30, 2010?

Under the Extended Home Buyer Tax Credit, as long as a written binding contract to purchase is in effect on April 30, 2010, the purchaser will have until July 1, 2010 to close.

Will the Tax Credit Need to Be Repaid?

No. The buyer does not need to repay the tax credit, if he/she occupies the home for three years or more. However, if the property is sold during this three-year period, the full amount credit will be recouped on the sale.

Extended Home Buyer Tax Credit can help prospective home buyers become part of the American dream. If you have specific questions or need additional information, please contact a tax professional or the Internal Revenue Service at 800-829-1040.

FIRST-TIME HOMEBUYER TAX CREDIT FOR HOMES UNDER CONTRACT BY NOVEMBER 6, 2009

 In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first-time homebuyers topurchase a home. The credit was designed as a mechanism to decrease theover-supply of homes for sale. For 2009, Congress has increased the credit to $8000 and made several additional improvements. This revised $8000 tax creditapplies to purchases on or after January 1, 2009 and before December 1, 2009.

Tax Credits -- The Basics

1. What’s this newhomebuyer tax incentive for 2009?

The 2008 $7500, repayablecredit is increased to $8000 and the repayment feature is eliminated for 2009purchasers. Any home that is purchased for $80,000 or more qualifies for thefull $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 creditwould be $7500. It is available for the purchase of a principal residence on orafter January 1, 2009 and before December 1, 2009.

2. Who is eligible?

Only first-time homebuyers areeligible. A person is considered a first-time buyer if he/she has not had anyownership interest in a home in the three years previous to the day of the 2009 purchase.

3. How does a tax creditwork?

Every dollar of a tax creditreduces income taxes by a dollar. Credits are claimed on an individual’s incometax return. Thus, a qualified purchaser would figure out all the income itemsand exemptions and make all the calculations required to figure out his/hertotal tax due. Then, once the total tax owed has been computed, tax credits areapplied to reduce the total tax bill. So, if before taking any credits on a taxreturn a person has total tax liability of $9500, an $8000 credit would wipeout all but $1500 of the tax due. ($9,500 - $8000 = $1500)

4. 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’scalled “refundable” credit. Thus, if the eligible purchaser’s total taxliability was $6000, the IRS would send the purchaser a check for $2000. Therefundable 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 theIRS prepares each year.

5. How does withholdingaffect my tax credit and my refund?

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

6. Is there an income restriction?

Yes. The income restriction isbased on the tax filing status the purchaser claims when filing his/her incometax return. Individuals filing Form 1040 as Single (or Head of Household) areeligible for the credit if their income is no more than $75,000. Marriedcouples who file a Joint return may have income of no more than $150,000.

7. How is my “income”determined?

For most individuals, income isdefined 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 ahost of other elements. AGI is the final number that appears on the bottom lineof the front page of an IRS Form 1040.

8. What if I workedabroad for part of the year?

 Some individuals have earnedincome and/or receive housing allowances while working outside the US. Theirincome will be adjusted to reflect those items to measure Modified AdjustedGross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

9. Do individuals withincomes higher than the $75,000 or $150,000 limits lose all the benefit of thecredit?

Not always. The creditphases-out between $75,000 - $95,000 for singles and $150,000 - $170,000 formarried 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 graduallywithdraw the credit. Thus, the credit will disappear after an individual’sincome 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 by75% as shown: Couple’s income $165,000 Income limit 150,000 Excess income$15,000 The excess income amount ($15,000 in this example) is used to form afraction. 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% ofthe credit amount would be allowed. In this example, the allowable creditwould be $2000 (25% x $8000 = $2000)

10. What’s the definitionof “principal residence?”

 Generally, a principalresidence 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 somehouseboats or manufactured homes count as principal residences.

11. Are thererestrictions on the location of the property?

 Yes. The home must be locatedin the United States.Property located outside the USis not eligible for the credit.

12. Are thererestrictions 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 obtainedby means of mortgage revenue bonds.) Now, mortgage-revenue bond financing willnot disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds aretax-exempt bonds issued by a state housing agency. Proceeds from the bonds mustbe used for below market loans to qualified buyers.)

13. Do I have to repaythe 2009 tax credit?

 NO. There is no repayment for 2009 tax credits.

14. Do 2008 purchasersstill 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 wil lstill be required to repay it over 15 years, starting with their 2010 taxreturn.

Some Practical Questions

15. How do I apply for the credit?

There is no pre-purchaseauthorization, application or similar approval process. All eligible purchaserssimply claim the credit on their IRS Form 1040 tax return. The credit will bereflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

16. So I can’t use thecredit amount as part of my downpayment?

No. Congress tried hard todevise a mechanism that would make the funds available for closing costs, butfound that pre-funding would require cumbersome processes that would, ineffect, bring the IRS into the purchase and settlement phase of thetransaction.

17. So there’s no way toget any cash flow benefits before I file my tax return?

Yes, there is. Any first-timehomebuyers who believe they are eligible for all or part of the credit canmodify their income tax withholding (through their employers) or adjust theirquarterly estimated tax payments. Individuals subject to income tax withholdingwould get an IRS Form W-4 from their employer, follow the instructions on theschedules provided and give the completed Form W-4 back to the employer. Inmany cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

Some “Real World” Examples

18. What if I purchaselater this year but can’t get to settlement before December 1?

The credit is available for purchasesbefore December 1, 2009. A home is considered as “purchased” when allevents have occurred that transfer the title from the seller to the newpurchaser. Thus, closings must occur before December 1, 2009 forpurchases to be eligible for the credit.

19. I haven’t even filedmy 2008 tax return yet. If I buy in 2009, do I have to wait until next year toget the benefit of the credit?

You’ll have a helpful choicethat might speed up the process. Eligible homebuyers who make their purchasebetween January 1, 2009 and December 1, 2009 can treat the purchase as if ithad occurred on December 31, 2008. Thus, they can claim the credit on their2008 tax return that is due on April 15, 2009. They actually have threefiling 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. (TheIRS 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 2008return before they purchase the home, they may file an amended 2008 tax returnon Form 1040X. (Form 1040X is available at www.irs.gov)

Of course, 2009 purchasers willalways have the option of claiming the credit for the 2009 purchase on their2009 return. Their 2009 tax return is due on April 15, 2010.

20. I purchased my homein early 2009 before the stimulus bill was enacted. I claimed a $7500 taxcredit 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 ona 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 theadditional $500 credit amount.

21. If I claim my 2009$8000 credit on my 2008 tax return, will I have to repay the credit just as the2008 credits are repaid?

No. Congress anticipated thisconfusion and has made specific provision so that there would be no repaymentof 2009 credits that are claimed on 2008 returns.

22. I made an eligiblepurchase of a principal residence in May 2008 and claimed the $7500 credit onmy 2008 tax return. My brother, who has never owned a home, wishes to purchasea partial interest in the home this spring and move in. Will he qualify for the $8000 credit, as well?

No. Any purchase of a principalresidence (or interest in a principal residence) from a related party such as asibling, 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.

23. I live in the District of Columbia. IfI qualify as a first-time homebuyer, can I use both the $5000 DC credit and the$8000 credit?

No; double dipping is notallowed. You would be eligible for only the $8000 credit. This will be anadvantage because of the higher credit amount, plus the eligibilityrequirements for the $8000 credit are somewhat more easily satisfied than theDC credit.

24. I know there is norepayment requirement for the $8000 credit. Will I ever have to repay any ofthe credit back to the government?
 

One situation does requirea recapture payment back to the government. If you claim the credit but thensell the property within 3 years of the date of purchase, you are required topay back the full amount of any credit, including any refund you received fromit. A few exceptions apply. (See below, #24). Note that this same 3-yearrecapture rule applies, as well, to the $7500 credit available for 2008. Thisprovision is designed as an anti-flipping rule.

25. What if I die or getdivorced or my property is ruined in a natural disaster within the 3 years?

The repayment rules are easedfor many circumstances. If the homeowner who used the credit dies within thefirst three years of ownership, there is no recapture. Special rules makeadjustments 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 aninvoluntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.

26. I have a home underconstruction. 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. 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 credit = $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.

RE: National Association of Realtors.