2009 Tax Incentive

Description of 2009 Tax Incentive

FIRST-TIME HOMEBUYER TAX CREDIT

As Modified by the American Recovery and Reinvestment Act

Buying a new home can get you a tax break. As part of the Housing and Economic RecoveryAct of 2008, a First-time Homebuyer Tax Credit was enacted. This tax break was scheduled toonly be around only until July 1, 2009. The American Recovery and Reinvestment Act (the“Stimulus Package”) has modified and extended this benefit.

  

Who’s Eligible?

First-time homebuyers who purchase a principal residence between January 1, 2009 and beforeDecember 1, 2009 are eligible. If you (and your spouse, if married) have not owned yourprincipal residence for a 3-year period before your purchase, you can qualify for the tax credit.

How does it work?

This credit is an income tax credit, it will directly reduce the total amount of taxes you owe. And,it is a REFUNDABLE credit. When you file your taxes for 2009, you will be able to subtract theamount of the credit from your Federal income tax liability, increasing the size of your refund orreducing the amount you owe. For example, you file your ‘normal’ tax return and find that youowe $3,000 in taxes, with this credit, your tax liability could be lowered by $8,000 - meaningyou instead get a $5,000 tax REFUND check from IRS.

How big is the tax credit?

The tax credit is equal to 10% of the purchase price of your home up to the maximum credit of$8,000 (the original credit was $7,500). The full credit is available for single individuals whoseadjusted gross income is less than $75,000. If your adjusted gross income is greater than$75,000 and your home purchase qualifies you for the full credit, the credit phases out totallyafter your AGI reaches $95,000. For married couples filing jointly, the credit begins to phaseout at an adjusted gross income of $150,000 and totally eliminated when AGI reaches$170,000.

What about Repayment?

Here is the biggest change from the earlier law. Under the version enacted in 2008, the taxcredit was not completely free money for you to keep. It had a payback provision that makes itsimilar to an interest free loan. Two years after the credit is claimed, you must begin repaymentso that you will have paid the credit back in full over the next 15 years. For those qualifying forthe full credit, the payback amount is $500 per year. For those getting less than the full credit,you pay equally over the 15 year period. If a qualifying home is resold before the credit isrepaid, the seller will have to immediately pay the outstanding balance of the credit. If the homeis sold at a loss, then you owe nothing back. That is still the case for home buyers who boughttheir homes between April 9, 2008 and December 31, 2008.

Under the American Recovery and Reinvestment Act, no repayment is required for purchases on or after January 1, 2009 and before December 1, 2009. If, however, the home is sold within3 years of purchase, the entire amount of the credit received is recaptured on sale of the home.

Are there other conditions I should know about?

Home purchases between relatives and other gifts of residences are not eligible for the credit.Purchases by non-resident aliens are not eligible.Any single family residence located in the United States that will be used as a principalresidence is eligible. Generally, this is the place where an individual spends most (more than50%) of his/her time. This includes single-family detached housing, condos or townhouses aswell as any similar type of new or existing dwelling.The credit will not result in an individual owing additional federal taxes under the Alternative Minimum Tax.

Other tax benefits of homeownership are still in place. Mortgage interest deduction, capitalgains tax exclusion, and property tax deduction are some well-known examples.

 

FIRST-TIME HOMEBUYER TAX CREDIT As Modified in the American Recovery and Reinvestment Act

Major Modifications Italicized

February 2009

FEATURE CREDIT AS CREATED JULY 2008 APPLIES TO ALL QUALIFIED PURCHASES ON OR AFTER APRIL 9, 2008 REVISED CREDIT – EFFECTIVE FOR PURCHASES ON OR AFTER JANUARY 1, 2009 AND BEFORE DECEMBER 1, 2009
Amount of Credit Lesser of 10 percent of cost of home or $7500 Maximum credit amount increased to $8000
Eligible Property Any single family residence (including condos, co-ops, townhouses) that will be used as a principal residence. No change All principal residences eligible.
Refundable Yes. Reduces (or can eliminate) income tax liability for the year of purchase. Any unused amount of tax credit refunded to purchaser. No change Purchasers will continue to receive refund for unused amount when tax return is filed.
Income Limit Yes. Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return). Phases out above those caps ($95,000 and $170,000). No change Same income limits continue to apply.
First-time Homebuyer Only Yes. Purchaser (and purchaser’s spouse) may not have owned a principal residence in 3 years previous to purchase. No change Still available for first-time purchasers only. Three-year rule continues to apply.
Revenue Bond Financing No credit allowed if home financed with state/local bond funding. Purchasers who utilize revenue bond financing can use credit.
Repayment Yes. Portion (6.67% of credit or $500) to be repaid each year for 15 years, starting with 2010 tax filing. No repayment for purchases on or after January 1, 2009 and before December 1, 2009
Recapture If home sold before 15-year repayment period ends, then outstanding balance of repayment amount recaptured on sale. If home is sold within three years of purchase, entire amount of credit is recaptured on sale. Applies only to homes purchased in 2009.
Termination July 1, 2009 (But note program changes for 2009) December 1, 2009
Effective Date Purchases on or after April 9, 2008 and before January 1, 2009. Repayment to begin for 2010 tax year. All revisions are effective as of January 1, 2009

 

Information provided by and with consent of:

WEBSTER & SCHELLIA PROFESSIONAL CORPORATION

ATTORNEYS AT LAW

1730 PARK STREET, SUITE 220

NAPERVILLE, ILLINOIS 60563

TELEPHONE: 630 . 4 1 6 . 4 5 0 0

 

If you have any questions regarding this tax benefit, please consult your tax advisor or give us a call at 630-416-4500.