The temporary $8,000 home buyer tax credit offered to people purchasing a new residence is set to expire on April 30. The program applies to both first time home buyers and to individuals who have resided in their home for at least 5 of the last 8 years.
To qualify for the program you must purchase a principal residence (not an investment or rental home, or a second home) by April 30. There is an additional requirement that the escrow close no later than June 30th. This second deadline was added to provide an orderly sunset to the program. The original plan expired November 30, 2009 with no cushion built in to actually close escrow.
People signing contracts only a week or two before the deadline last November were hard pressed to get their loans approved and escrow closed in time. Rebecca and I worked with 4 families who quickly selected homes during October to beat the deadline. Now, with the possible exception of a brand new home under construction, the 60 day window between the two deadlines is more than enough time to close an escrow. For homes under construction the IRS is defining the qualifying date as of the day you first occupy the residence.
The tax credit is $8,000 (or 10% of the sales price, whichever is lower) for anyone who has not owned a principal residence within the previous 36 months.
The tax credit is $6,500 for those who have lived in their current residence for 5 consecutive years during the last 8. You do not have to sell your current residence in order to qualify for this “move up” section of the program. You just have to move into the new property as your primary residence.
The credit will reduce your taxes owed or increase the amount of your tax refund dollar for dollar. The best part is that “tax credit” means you get the full credit even if you owe no taxes.
To be eligible for the full credit your modified adjusted gross incomes (MAGI) cannot exceed $125,000 for single filers or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000 (single filers), or $225,000 and $245,000(joint filers) are eligible for a reduced credit. Those with higher incomes do not qualify. The income limits are slight less if you purchased your home before November 7, 2009.
The IRS allows you to claim the credit on either the 2009 tax return (you can file an extension if not yet completed, or file an amended return to obtain the refund sooner), or the 2010 return.
A frequent question we get is how can you apply this tax credit to your down payment so you don’t need as much money to close escrow? The answer is there isn’t a way – at least in the state of Washington. Some states have made funds available as sort of a short term loan, repayable when you get your tax credit, but the Washington Housing Finance Commission was not able to develop a program. The best suggestion I can make to limit your down payment is to make sure your real estate agent and lender structure your transaction to minimize your out of pocket expenses. There are many ways to accomplish this.
While there are lots of details that can’t be covered in the space of this article, two important ones are that you will not qualify for the credit if you purchase a home from a direct relative and you will have to repay the credit in full if you cease to occupy the home as your primary residence within 36 months of purchase.
An important distinction is that this is an IRS program – it has nothing to do with loan programs or lending guidelines. I strongly recommend you speak with a tax professional if you have specific qualifying questions as they are the only ones with the expertise to do so.
Michael has 20 years experience in the lending industry. In that time he’s directly helped over 1,400 families finance the purchase of a new home or refinance an existing loan to a lower interest rate. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to Lake Spokane Home Loans. Together they are licensed to help families in the states of WA and CA. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to MMullin@TheLoanConsultant.com.
