By now, most everyone has heard about the $8000 First-Time Homebuyer credit which allows buyers who have never owned a home OR haven't owned one in the past three years, to receive an $8000 credit on their tax returns. Please see the frequently asked questions below that discuss the particulars involved in realizing this "free money"!! Recently the NAR (National Association of Realtors) released a statement that not only could first-time buyers realize an $8000 CREDIT (not DEDUCTION...see difference in the FAQ's below) but that you could utilize that future credit towards your required 3.5% down-payment on FHA (Federal Housing Authority) loans!! Sound too good to be true?? Well, theoretically "NO". HUD (Housing and Urban Development) made several announcements that the $8000 tax credit could now be used for closing costs and pre-paid items on FHA loans. However, NOT for the required 3.5% down payment. Some states have already set up programs that will provide short term loans to borrowers that will use as collateral the $8000 tax credit. Oregon has been "talking about" monetizing the tax credit for several months. The problem is, where do they get the money that they will, in turn, lend to potential buyers? This program is only for borrowers who close on their purchase by November 30th of 2009. So, by the time the state or local agencies figure out how to help fund this process, the credit may be gone. Since rates have risen as the stock market has improved in the past week or so, buyers may well want to consider finding a way to get a gift for the down payment (if they don't have their own monies), then negotiate to have the seller pay their closing costs and pre-paid items. That way first-time buyers can get the transaction completed before the credit is gone, collect the $8000 credit and still realize the present great rates. Here are some frequently asked questions about the first-time buyer tax credit:
The “FIRST-TIME HOME-BUYER CREDIT” (AND WHAT IT MEANS TO YOU, A FRIEND OR FAMILY MEMBER)!
PLEASE pass the information to someone you know who might be in the market for their first home!!!
Q: How much is the tax credit?
A: The tax credit would be $8,000 or 10% of the purchase price, whichever is less.
Q: Who is eligible?
A: Similar to the $7,500 tax credit included in the Housing and Economic Recovery Act of 2008, the $8,000 tax credit (included in the 2009 Economic Stimulus Plan) is available for the purchase of the primary residence by first-time homebuyers.
Q: What defines a “first-time home buyer”?
A: According the IRS, any taxpayer who has not owned a home during the 3 years prior to the date of purchase can qualify for the credit.
Q: Do I have to repay the $8,000?
A: No. Unlike the previous $7,500 tax credit that did have to be repaid (which made it essentially an “interest free loan”), the $8,000 does NOT have to be repaid, UNLESS the home is sold within three years of purchase. If the home IS sold within that 3 years period the credit is simply reversed.
Q: What if I have no tax liability?
A: The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
Q: Are there any income limitations on the tax credit?
A: Yes. The tax credit is strictly for individuals with adjusted gross income (AGI) of under $75,000 or $150,000 for joint filers. AGI is total income for a year minus certain deductions, but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4.
Q: If my AGI is a bit more than the designated $75,000 or $150,000 respectively, can I still claim the credit?
A: It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose AGI exceeds the phase-out limits.
Q: What is the difference between a tax credit and a tax deduction?
A: A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. For example, if you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter which bracket you might be.
Q: What type homes qualify for the tax credit?
A: Included are single-family detached homes, attached homes like townhouses and condominiums, manufactured homes or mobile homes and houseboats (as long as all other criteria are met).
Q: What is the time frame for completing my purchase to be eligible for the “First-Time Homebuyer” credit?
A: This tax credit applies to properties purchased on or after January 1st, 2009 and before December 1st, 2009 (so there’s still lots of time). First-time home buyers who purchased a principal residence on or after April 9th, 2008 and before January 1, 2009 may qualify for the former $7,500 tax credit (which must be repaid, but operates like a zero interest loan). Purchase date refers to the date you closed escrow on the property.
Q: What if I am eligible to participate in another state or local first-time homebuyer mortgage program?
A: You may now claim the credit (previously this credit was prohibited if you participated in any other first-time homebuyers initiatives).
Q: What if the home is a short sale or foreclosure?
A: The credit does apply.
Q: What if the home is in disrepair and I’m willing to do the work but worried about getting the home financed?
A: There are two possibilities for financing: the FHA 203k loan and a conventional “Purchase&Renovate” loan (call or write for more info on those forms of financing).
This is a loaded question in a time of depreciating home values. There is no “absolute answer” and there are lots of variables. Obviously, consulting a trusted accountant, financial advisor, mortgage broker and real estate professional are key components. First, you need to identify your own financial goals; do your goals include homeownership and/or real estate as part of your total financial portfolio? For most people, at least, homeownership is a desire. All prudent investments take some research and preparation. Understanding the tax benefits to owning property is key and understanding how to potentially maximize your investment is a learning curve. Is this the right time to buy? Is this the “bottom” of the market? Both are reasonable questions with not so obvious answers. I do believe that it very difficult, if not impossible, to “time the market”. You only know you’re been at the bottom of a market when you’re on your way back up! However, one thing I do know is that interest rates are very, very, VERY low!! If you do the math on any price range and compare what even a 1% increase in interest rates does to the overall financial picture and you will determine for yourself that “interest rates trump price”.
