Written by Gary Kline Sunday, 03 May 2009 23:23

Owning a home can result in many tax advantages such as deducting mortgage interest and real estate taxes if you itemize deductions.

The government’s recent attempts to stimulate our economy have included additional tax advantages for some first-time home buyers. In July 2008, Congress enacted a tax credit of up to $7,500 for some first-time home buyers. The 2008 tax credit required the taxpayer to repay any credit received over time which essentially made the credit equivalent to an interest free loan.

The tax credit was greatly enhanced by the American Recovery and Reinvestment Act of 2009 which now allows a tax credit of up to $8,000 for qualified first-time home buyers who buy their principal residence from January 1, 2009 to November 30, 2009. Not only is the new credit up to $500 greater but more importantly it does not have to be repaid, in most circumstances.It is a true credit, for income tax purposes, meaning that it provides a dollar for dollar reduction in tax liability and can even result in a refund for some low income taxpayers who have little or no federal tax liability. The home may be either brand new construction or part of the existing home inventory. To take advantage of the new credit a buyer needs to pass only a few tests.

First, the buyer must to be a first-time buyer. The Act defines a first-time buyer as a person who has not owned a principal residence for three years prior to closing (transfer of title). It is important to know that if buyers are married then both spouses must pass this first-time buyer test.

Second, there are income limitations on the credit. To receive the maximum allowable credit, a taxpayer’s modified adjusted gross income must be less than $70,000 (single) or $150,000 (joint). The credit is phased-out for taxpayers with greater income and is totally unavailable for taxpayers with modified adjusted gross income of over $95,000 (single) or $170,000 (joint).

Third, there are limitations on the type of homes available for the credit. The home must not only be used as the taxpayer’s principal residence but it must also be a single family detached home, townhouse, condominium, mobile home or even houseboat. Consequently, this area’s many two family homes would not be eligible.

Finally, the amount of the credit is limited to 10% of the purchase price with a maximum credit of $8,000 (with some maximum sales price limitations).

The credit is not without some strings. With a few exceptions, the credit taken by a homeowner is subject to recapture if the home being purchased is not used as the taxpayer’s principal residence for a minimum of three years.

The law regarding the credit has many nuances. To claim the credit taxpayers need to complete IRS Form 5404 and then transfer the credit to line 69 of your IRS Form 1040. The tax law also allows a taxpayer who buys a home in 2009 to elect to accelerate the credit by applying it instead to their 2008 income tax return. This may be advantageous since a taxpayer can easily calculate the credit they can receive since they already know their modified adjusted gross income for 2008. Conversely, if the taxpayer instead waits to take the credit in 2009 the allowable credit is really unknown at the time of the home purchase. If you have already purchased your home in early 2009 and have filed your 2008 income tax return claiming the earlier $7,500 credit you can amend your 2008 tax return by filing IRS Form1040X.

Moreover, a taxpayer who expects to qualify for the first-time home buyer credit (by purchasing a home later this year) may think about accumulating more money for a down payment by reducing his or her tax withholding and thereby increasing take home pay. Caution, however, should be taken since if the taxpayer fails to purchase a home or else is later determined to not qualify for the credit the IRS will assess the applicable tax, interest and possibly penalties if the taxpayer is underpaid.

With interest rates near historically low levels and the area’s housing prices relatively attractive the newly enacted first-time home buyer tax credit could not come at a better time to help jumpstart our economy and local real estate market.

This article is not intended to be a substitute for competent tax, legal or accounting advice and before you make any decisions or take any actions, you should consult a qualified professional advisor to whom you have provided all of the pertinent facts applicable to your particular situation.

Gary B. Kline, Esq.
Partner
Coughlin & Gerhart, LLP
Binghamton, NY<
www.houseatty.com