In a previous post, I ruminated about what type of person was in a good position to take advantage of some of the financial incentives the government was offering. Things have changed a lot since then, and some of those incentives have evolved. The homebuyer credit I referenced at that time did not change, but it was enhanced for purchasers of homes in 2009. For instance, buyers in 2009 will be eligible for an $8,000 tax credit, up from $7,500 in 2008. Of bigger import, while the 2008 credit was essentially a loan that had to be paid off over 15 years, taxpayers who qualify for the 2009 credit will not have to pay off the loan unless they sell the house within three years of purchasing it.

Quick review: a tax credit is a dollar for dollar reduction in taxes owed. So if you complete your return and find that you’ve paid the IRS $6000 throughout the year through withholding, and now owe an additional $3000, a credit of $8000 would entitle you to a refund of $5000. In other words:

Restrictions

• The credit will not exceed 10% of the purchase price of the home; it is up to $7,500/$8,000 based on whether or not the purchase price exceeds $75,000/$80,000.
• The primary home must be in the US.
• The primary home must have been purchased by the taxpayer, i.e. it cannot have been inherited or gifted to them.
• The primary home cannot have been purchased from a “related” person – husband/wife, parent, grandparent, child, grandchild.
• The taxpayer must be a US citizen or a resident alien with an Individual Taxpayer Identification Number.
• The purchase date of house must be between April 8, 2008 and November 30, 2009.
• The taxpayer cannot have owned a primary residence for three years prior to the date of purchase, although owning a home prior to the three year period does not disqualify him or her.
• Income limits: full credit is available for single taxpayers with a modified adjust gross income (MAGI) up to $75,000 and married couples filing jointly with a MAGI up to $150,000. The credit phases out for taxpayers making more than that and is wholly unavailable for single filers making more than $95,000, and married filing jointly filers making more than $170,000.

Mechanics

• If the home is purchased in 2009, the credit can be claimed on either the 2008 return (or amended return) or the 2009 return. This is a nice feature that allows for some strategizing.
• Use Form 5405 to claim the credit.
• Repayment for 2008 “credits” will be repaid in 15 equal installments on an annual basis.
• Payments begin in 2010.
• If the taxpayer dies, the remaining balance is forgiven, although a surviving spouse would have to continue paying ½ of the balance due.
• If the home is sold or otherwise ceases to be the primary residence within the 15 year repayment period, the balance becomes due.

Summary of differences between 2008 and 2009