- Both Congress and Microsoft really like their Beta programs!
I suppose everyone in America has heard something concerning the Home Buyer tax credit by now. However, hearing about any new tax laws doesn’t necessarily mean you’ve got the full story. And…Surprise!! Congress is not known for writing tax (or any) laws in a user-friendly format. So I’ll try to break it down into plain English that we can all understand.
The first thing to remember is that Congress does an excellent job making tax laws ever more complicated as time goes on. Let’s start with the original tax credit available on the tax year 2008 return. Please be advised, I am keeping this summary simple to avoid writing a tome.
Tax Credit Version 1.0
The original Home Buyer tax credit (what I like to call version 1.0) was a $7,500 tax credit for a single taxpayer or a married couple filing jointly. The credit is phased out based on your modified adjusted gross income (MAGI). In other words, I you had too much income; the credit would be gradually taken away. Also, there were some oddball exceptions that prevented one from taking the credit. Some include purchasing the home from a relative or being a nonresident alien, etc.
What’s important to know about this credit are these four points:
- First, it applies to home purchases after April 8, 2008, and before Jan. 1, 2009.
- Second, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period starting on your 2010 tax return ($500 per year).
- Third, for purposes of the credit, you are considered to be a first-time homebuyer if you, and your spouse if you are married, did not own any other main home during the three-year period ending on the date of purchase.
- The last point is one that causes a lot of frustration for folks who took this credit in 2008. Even though Congress sweetened the credit in 2009 and beyond by increasing the amount of the credit and removing the repayment requirement, those who took the 2008 tax credit STILL HAVE TO PAY IT BACK over a 15-year period.
Tax Credit Version 2.0
That New Home Buyer tax credit in 2008 didn’t exactly hit a home run. In fact, the real estate marker kept plunging into the abyss. Let’s face it; it doesn’t take a genius to sniff out a Congressional gimmick. While the credit was really an interest free loan it was not free money. So Congress went back to the drawing board (version 2.0) and made the credit a lot more generous in the following two ways:
- First, the original $7,500 credit was increased to $8,000 for a single taxpayer or a married couple filing jointly. Again, the credit is phased out based on your modified adjusted gross income (MAGI).
- Second, the tax credit does not have to be paid back. FREE MONEY!!!
In addition, the tax credit applies to home purchases between Jan 1, 2009 and before Dec 1, 2009. Also, for purposes of the credit, you are considered to be a first-time homebuyer if you, and your spouse if you are married, did not own any other main home during the three-year period ending on the date of purchase (same as the 2008 tax credit).
First-time home buyers who purchase a home in 2009 can claim the credit on either a 2008 tax return or a 2009 tax return. If the 2008 tax return was already filed before the 2009 home purchase, an amended 2008 tax return can be filed.
Moving forward, the law starts to enter what I call the Tax Twilight Zone….
Well guess what? Congress again went back to the draw board. It was not because the credit was a failure but rather a success. The credit was working so well that many individuals feared letting it die a natural death would result in further real estate declines. It took awhile, but the housing market was now addicted to the tax credit drug. So Congress decided to make some additional changes (version 2.5).
Tax Credit Version 2.5
Essentially Congress decided to extend the credit from Dec 1, 2009 to May 1, 2009. The same rules during 2009 still apply up to May 1, 2010. But there is the new twist, after Dec 1, 2009 and before May 1, 2010, the credit was extended to longtime homeowners (although at a reduced amount of $6,500). To qualify, longtime homeowners must have lived in their old home for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home.
If that’s not enough, it gets better. In order to combat fraud, the IRS will now require 2009 and 2010 returns claiming the Home Buyer tax credit to include proof of home purchase. In the case of longtime homeowners, documentation that shows proof of meeting the five year rule must also be included. Thus, taxpayers claiming the credit on a 2009 or 2010 tax return MUST file a paper return (electronic returns cannot handle attachments). This will slow down the refund process by a few months.
Tax Credit Version 2.6???
As I mentioned earlier, the housing market is now addicted to this credit and kicking the habit will probably result in some serious withdrawals. Word around the campfire is that Congress is considering some sort of tax credit extension. However, nothing is final until signed by the President. So, we’ll keep providing information on future versions, bug fixes and patches, so to speak, as Congress keeps reconfiguring this tax incentive.
Thanks for the info. Quick question though, I was filling out my tax and there was no place to report that I took the 2008 $7500 credit/loan. Which means I have no idea how to pay them back… with they just automatically deduct from my tax return?
thanks,
family finance
Hi Family Finance, Sorry for the delay in responding to you–tax season is in full swing so we’re working hard to keep up with our online questions too!
If you purchased your home between April 9, 2008 and before July 1, 2009 then the First-Time Homebuyer Credit payback period does not start until you file your 2010 tax return by April 15th, 2011.
When you file the 2010 return you will have to recapture ratably, interest free, the $7,500 First-Time Homebuyer Credit over 15 years. This means that $500 will be added to the tax owed or $500 will be deducted from your refund.
We currently have not seen the 2010 1040 form nor have we received any guidance from the IRS regarding how to enter the First-Time Homebuyer Credit information into the 2010 tax returns. I expect that we will receive that information this summer at the IRS Tax Convention regarding the 2008 First-Time Homebuyer Credit. I will post a blog as soon as I receive guidance from the IRS regarding the recapture of the 2008 First-Time Homebuyer Credit.
I hope this answered your question, if we can be of any further assistance, please feel free to email or call our office!
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