Clients, friends and future clients,
 
Here is a break down of the new law regarding Homebuyer credits and a few common questions people have.  Please consider my services as a local real estate professional and home loan professional should you need these services. 
 
I hope you continually find my newsletters and updates helpful in your daily lives.  My contact information is below should you wish to contact me and of course :) you have my email address.  Enjoy. - George Kininmonth - Stockton, CA  George_Kininmonth@hotmail.com
 

Thanks to the newly extended and expanded tax breaks for buying a home, you might qualify for a credit that you hadn't been able to get before.

President Barack Obama has signed legislation extending the $8,000 first-time-homebuyer tax credit beyond its scheduled Nov. 30 expiration and creating a $6,500 credit for longtime homeowners who buy new homes. With thousands of dollars at stake, it's not surprising that potential homebuyers have lots of questions. We have the answers.

How does the extension work?

It's simple: The old credit was scheduled to expire Nov. 30, so folks who hadn't already signed a contract faced a daunting task to get a deal closed by the deadline. Some real estate agents were writing provisions into contracts making the purchase contingent on the deals closing in time for buyers to get the credit.

Under the new law, the credits are available to qualifying buyers who sign a binding contract by April 30, 2010, and who close by June 30, 2010. The two-month period should offer plenty of time for last-minute buyers to get to the closing table.

Are the rules the same?

No. There are a few differences that apply to deals closed after Nov. 6, the day President Obama signed the bill. First, the similarities:

• You're considered a first-time buyer if you have not owned a home for at least three years before the date you settle on your new home.
• A credit is available only for the home you live in. It's not available for rental properties or vacation homes.
• For first-time buyers, the credit is 10% of the purchase price of the home, up to $8,000. Therefore, if your house costs $80,000 or more, you can qualify for the maximum tax credit.
• The credit does not have to be repaid, as long as you live in your house for at least three years. If you sell or move out before three years, you have to repay the money as extra tax on your tax return for the year you sell or move. (The payback can't exceed the amount of profit you make on the sale, though.)

Now for the key differences:

• Longtime homeowners can get a credit now, too, but it tops out at $6,500.
• You don't get a credit if the house you buy costs more than $800,000. (There was no price cap for deals closed before Nov. 7.)
• The new law increases how much buyers can earn and still claim a credit. For deals closed before Nov. 7, the right to the credit gradually disappeared as adjusted gross income rose between $75,000 and $95,000 on single returns and between $150,000 and $170,000 for married couples filing joint tax returns. (Adjusted gross income is basically your income after you subtract your personal and dependent exemptions and your standard or itemized deductions.)
• Now the phase-out zones are $125,000 to $145,000 for singles and $225,000 to $245,000 for married couples.

When we signed our contract to buy our first home in October, we were kind of bummed because our $190,000 income meant we made too much to qualify for the credit. We won't close until mid-November. Do we get a credit now?

You're in luck. The new, higher income limits apply to deals closed after Nov. 6. Enjoy your windfall.

How does the new $6,500 credit work?

This credit is available to qualifying buyers who sign a binding contract by April 30, 2010, and who close on a new home between Nov. 7, 2009, and June 30, 2010. To qualify, you must have continuously owned and lived in a home for at least five of the eight years leading up to the purchase of a new home.

If you have owned and lived in your current home for at least five years, for example, you can qualify. If you bought the home you're living in now less than five years ago, however, you won't qualify.

The credit is 10% of the purchase price, up to $6,500. As with the first-time-buyer credit, this one is available only for the purchase of a principal residence, not a vacation home or rental property. And if you sell the place or move out within three years, you have to pay back the credit on your tax return for the year you sell or move. Homes that cost more than $800,000 are ineligible for the credit.

Income-eligibility rules are the same as for the first-time-buyer credit. The right to claim the credit disappears as adjusted gross income rises between $125,000 and $145,000 on a single return and between $225,000 and $245,000 for married couples filing joint returns.

It looks as if we qualify for the move-up credit, but we signed a contract to buy our home before the president signed the new law. We're going to close at the end of November. Do we get the money?

As long as you close after Nov. 6, you can qualify for the credit. The new credit is often referred to as a move-up credit.

We plan to sell our home and retire to a smaller place. Is the $6,500 credit available only if you buy a more expensive home?

Don't worry. "Move-up" is a misnomer often used to distinguish this from the first-time-buyer credit. It's OK to downsize.

There are no rules about the cost of the house you sell or the home you buy, except that the new house can't cost more than $800,000.

How do I claim a credit?

The procedure is the same for both the first-time-buyer and longtime-resident credits. Once you close on a qualifying house, you claim a credit on your federal tax return. If you close in 2009, you can choose whether to claim the credit on the 2009 return you file next spring or on an amended 2008 return. Choosing the amended return would bring you a refund of the full credit amount. If you claim the credit on your 2009 return, it will reduce your tax bill for the year by the amount of your credit.

This is what's called a refundable credit so if the credit reduces your tax bill below zero, you'll get the difference as a tax refund. If you close on a home in 2010, you can claim the credit on either your 2009 or 2010 return. Sooner rather than later is the choice to make.

You'll need to file a Form 5405 to claim the credit and include a copy of your settlement statement (such as the HUD 1 form) to prove that you bought the house. The settlement statement was not required for deals that closed before Nov. 7.

Is there an age limit for the credit?

Not on the upper end. But as part of an anti-fraud effort, neither homebuyer credit is available to taxpayers who were under age 18 at the time of the purchase. The discovery that taxpayers as young as 4 years old were claiming the first-time-buyer credit cast suspicion that some hanky-panky was going on. Married couples can qualify for the credit as long as one spouse is at least 18 at the time the deal is closed.

The new law also bans anyone who is claimed as a dependent on someone else's return from claiming a homebuyer credit.

Can I claim the credit for the purchase of a vacation home? How would the Internal Revenue Service know whether I was living there full time?

The credits are available only for the purchase of a principal residence. As for how the IRS might know a new house is a vacation property, the fact that your tax return was filed from an address that's different from the address of the new property (which would be shown on the settlement sheet) might raise some eyebrows. If the IRS concludes that a claim is fraudulent, it can impose a 75% penalty, which would cost $6,000 on an $8,000 credit claimed for a vacation home.

We bought a home Oct. 15, 2003, and sold it in August 2008. So we owned the home for slightly less than five years. We are renting an apartment now and are looking to buy a home. Do we qualify for the first-time-homebuyer tax credit as amended, assuming that we pass the necessary income tests?

Sorry, but based on the facts you present, you're out of luck. To qualify for the first-time-buyer credit, you cannot have owned a home within the previous three years. You sold your previous home just 15 months ago. And it appears that your ownership of that home was a few months shy of five years, the minimum period of continuous ownership required for you to qualify for the longtime-resident credit.

Can I qualify for both the first-time-buyer and longtime-resident credits?

No. You can claim only one or the other.

My husband's parents are offering to sell us their vacation home as our first home. Would we qualify for the first-time-buyer credit?

Not anymore. The original first-time-buyer credit law disallowed the credit if the home sale was between related parties, but there was a loophole for the situation you describe. Since you are not related to your husband's parents, except by marriage, you could have qualified for the credit, assuming you bought the home jointly. The new law, however, puts the kibosh on that, effective for purchases after Nov. 6, 2009.

This article was reported by Kevin McCormally for Kiplinger's Personal Finance Magazine.

 Respectfully,