With the recent extension and expansion of the homebuyer federal tax credit, both existing homeowners and first-time buyers are now eligible for a credit. So what do you have to do to qualify?
First, the new rules are pretty much the same as the old first-time homebuyer tax credit, which was scheduled to expire on Nov. 30. The main difference is that there's now a $6,500 tax credit for repeat buyers, in addition to the $8,000 tax credit for first-time buyers.
The deadlines, of course, have changed as well. Under the new rules, you have until April 30 to complete a signed sales contract on a home, and close on the sale by June 30. Members of the military who served overseas during this period may qualify for a one-year extension.
Under the new rules, the personal income limits have also been raised. To qualify for the full credit, the income limits are $125,000 for a single purchaser may and $225,000 for a couple. The credit then phases out up to maximum incomes of $145,000 and $245,000, respectively. These limit are the same for both first-time and repeat buyers. The limits under the old program were $75,000 for singles and $150,000 for couples.
First-time and repeat buyers defined
There are also special rules that define who qualifies as a first-time or a repeat buyer. To qualify as a repeat buyer, you need to have owned and occupied the same home for at least five of the past eight years - owning two or more properties consecutively during those five years doesn't count. To qualify as a first-time buyer, you must not have owned a home for at least three years.
For married couples, only one needs to have owned a home to qualify for the repeat buyer credit, but both must qualify for the first-time homebuyer credit. For unmarried persons buying a home together the rules get more complicated, but generally speaking, one of them can qualify for and receive either credit even if their partner does not. Full rules are explained in IRS Notice 2009-12.
The property you buy must also be used as your principal residence to qualify for the credit and you must remain there at least three years. The credit may be claimed for any property that is used as a principal residence, including single-family homes, attached condominiums, mobile homes and even houseboats. It may not be claimed for second or vacation homes or for investment properties.
Do you have to sell your current home?
The law is a bit less clear on whether a repeat buyer must sell their current property in order to claim the credit on a new principal residence. Obviously, a buyer will need to file their tax return listing the new property as their place of residence to qualify, but it is not clear whether the buyer can convert their previous home to a second residence or income property, then claim the credit on the new property. It is strongly advised that you contact a professional tax advisor before undertaking such a move - if the IRS determines your claim is fraudulent, you could pay a penalty of up to 75 percent of the credit, or $4875 for a $6,500 credit.
Both the $8,000 first-time buyer and $6,500 repeat buyer tax credits are maximums - the actual credits are capped at 10 percent of the purchase price of the home. That is, if you purchase a $60,000 home as either a repeat or first-time homebuyer, your tax credit will be $6,000.
The tax credit is what's known as a refundable credit, meaning it is subtracted directly from the federal taxes you owe. It counts exactly the same as money withheld for your taxes. If the credit reduces your tax obligation to less than zero, you are entitled to a refund in that amount.
Two-year window for claiming the credit
An important point to note for some buyers is that the credit may be claimed on either your 2008 or 2009 taxes for sales closed by Jan. 31, or on your 2009 or 2010 returns for sales closed after the first of the year. This can be critical if your income fluctuates from year to year - you may be eligible to claim the credit on one year's return, but not another's.
Other limitations apply as well. You may not have purchased the home from a relative, either a direct ancestor or descendent. In addition, you must be at least 18 years old to claim the credit. For more information, consult with a tax advisor or visit federalhousingtaxcredit.com, a site offered by the National Association of Home Builders.