If you were one of the millions of people who became a homeowner between 2008 and 2010, whether it was your first time or your fifth, your purchase will have quite a noticeable effect on your taxes. That’s not only due to the lovely bump you’ll get from deducting your mortgage interest and property taxes, but you may also receive a nice fat tax credit on top of that!
For many, participating in these programs will have effects for years to come. There are special rules to determine who’s eligible, as well as tax credits available for non-first time home buyers, and a special extension for members of the military and federal employees who were stationed outside of the country, which we’ll discuss below.
First, I’ll delve into exactly what the home buyer’s tax credit is and who qualifies for it based on income requirements. Then, I’ll delve into the specific details and requirements of the 2008 and 2009 Homebuyer’s Tax Credit before touching on some special exemptions.
Who’s Eligible for the First-Time Homebuyer Tax Credit?
The federal government defined a first-time home buyer in an odd way – it actually means anyone who did not own a home during the three years before the year in which they bought the home. So if you owned a home but sold it in 2004, and then bought another home in 2008 or after, you would actually qualify as a first-time home buyer.
You must purchase a single-family home from someone unrelated to you. This can be a free-standing home or an attached home like a townhouse, a condo, manufactured or mobile homes, or even a houseboat, as long as you meet residency requirements. But multi-family homes like duplexes or apartment buildings do not qualify.
Also, only U.S. citizens are eligible for this credit. For homes purchased November 7th, 2009 or later, you must be at least 18 years old, you must not be someone else’s dependent, and the home must cost $800,000 or less. Income restrictions apply, depending on your tax filing status, and are different depending on when you purchased the home.
Before November 7th, 2009 (based on modified adjusted gross income):
- Married filing jointly: $150,000 or under for full credit, completely phased out by $170,000
- All other filing statuses: $75,000 or under for full credit, completely phased out by $95,000
November 7th, 2009 or after (based on modified adjusted gross income):
- Married filing jointly: $225,000 or under for full credit, completely phased out by $245,000
- All other filing statuses: $125,000 or under for full credit, completely phased out by $145,000
How Big Is the Available Tax Credit?
The available tax credit is worth 10% of the purchase price of the home, up to a maximum of $7,500 if the home was purchased in 2008, and $8,000 if the home was purchased in 2009 or 2010. If you are eligible to participate in the program for military personnel, your deadline is extended and you can still receive up to $8,000 or 10% of the purchase price, whichever is smaller (as of April 2011).
If you purchased a home with your spouse and file as married filing separately, each of you can take a maximum of half the available tax credit as long as you both qualify to be first-time homebuyers. If you purchased a home with one or more people who is not your spouse, only one of you has to be a first-time home buyer. Plus, you can split the tax credit between all the home purchasers, but it doesn’t have to be split equally, or split at all (e.g. one person can take all of the credit if the other doesn’t qualify due to income restrictions).
The 2008 Homebuyer’s Tax Credit – Specific Rules
This credit was applicable for home purchases where the sale was closed and the title transferred to you between April 8th, 2008 and December 31st, 2008.
If you purchased the home in 2008, you must live in the home for a year after the day you receive the title. If you built the home, your residency requirement would last for a year after the actual day you moved into the home. Failing to meet these residency requirements means that you will have to pay back the entire balance.
When might I have to repay the tax credit?
If you received the $7,500 tax credit for purchasing a home in 2008, you will repay some or all of the credit. The 2008 tax credit was essentially an interest-free loan from the government which is repaid $500 per year over the next 15 years. So if you got this credit, each year for the next 15 years (starting in 2010 and ending in 2024) you will have an additional $500 of tax liability to pay. Hopefully this will be offset somewhat by your new mortgage deduction.
There are a few situations in which your repayment terms can be altered:
- If you claimed the tax credit using any filing status but married filing jointly, and then pass away, your estate will not be required to pay off the rest. However if you filed as married filing jointly, your spouse will need to continue on the 15 year repayment.
- If you transfer the home to a spouse in a divorce settlement, the spouse gets not only the house but the repayment. He or she will need to pick up where you left off on the repayment schedule.
- If you stop using the house as your main residence, all of the remainder of the repayment that you owe will be due on your taxes for the year when you stopped using it. So if you decide to become a landlord and rent out the home in 2011, you’ll have made only one payment (in 2010) so you’ll owe the government the rest ($7,000) on your 2011 taxes.
- If you sell the home before you have finished repaying the credit, you must repay the remainder of the credit, but only up to the amount that you profited on selling the home. So if you purchased your home for $150,000 in 2008 and sold it three years later to someone unrelated to you in 2011 for $155,000, you made a profit of $5,000, but by that point still have a balance of $7,000 to repay. Since you only made $5,000 on the sale, however, you only have to repay $5,000 of the credit. If you sold the home for exactly the same amount that you purchased it, or sell it for less, you do not need to repay the credit.
The 2009-2010 First-Time Homebuyer Credit – Specific Rules
In order to claim this tax credit, which is worth 10% of the home’s price up to $8,000, you must have closed on the house and had title transferred to you between January 1st, 2009 and April 30th, 2010. You can also get the credit on homes purchased up to September 30th, 2010, as long as you had a valid sales contract signed on or before April 30th, 2010.
To avoid having to repay the credit, you must live in the home for three years (36 months) after the actual closing date. If you built the home, your residency would start the day you moved in. You cannot use it as a vacation home or rent the whole house to someone else (although renting out a room in the house is okay).
When might I have to repay the credit?
If you received the $8,000 tax credit for a home purchased in 2009 or 2010, the rules are a bit different. You do not have to repay the credit at all if you lived there as your main residence for three years from the date that you closed on the home. If you move out or stop using the home as your primary residence before three years have elapsed, you will need to repay the entire credit on your tax return for the year when you stopped living there. There are a few exceptions to this rule, listed below.
- If you are military, intelligence, or foreign service personnel and you are now required to live in government quarters, or are reassigned to duty more than 50 miles from your home.
- If your home is seriously damaged and you cannot live in it. (This must be involuntary damage – no hijinks!) You must buy a new home within two years, however.
- If the homeowner passes away within 36 months of the purchase. (However, if your spouse is living there, he or she must live there until the 36 month period is up, or repay half of the credit.)
- If the home is part of a divorce settlement, whoever receives possession of the home has to live there until 36 months past the date of purchase, or that spouse will have to repay the credit, even if the other spouse initially received the credit.
- If you sell the home to someone unrelated to you, you must repay the tax credit, up to the amount that you profited on the sale of the home. If you took a loss selling the house, you do not need to repay the credit.
The 2009 and 2010 Repeat Homebuyer’s Tax Credit
There’s good news for repeat homebuyers, too! For homes purchased between November 6, 2009 and April 30th, 2010, or purchased by September 30th, 2010 if a contract was in place before April 30th, 2010, many people who are not first-time homebuyers may qualify for a tax credit. The credit is worth 10% of the home’s price, up to a maximum benefit of $6,500. It cannot be taken on a home purchase worth more than $800,000.
If you had previously owned and lived in the same home for five of the eight years before you purchased the new home, you can qualify for a tax credit. You can also take this credit if building a new home; you would use your move-in date to figure out if you had been in the previous home for five of the previous eight years.
Income Limits (on modified adjusted gross income)
- Married filing separately: $225,000 limit for full credit, completely phased out by $245,000
- All others: $125,000 limit for full credit, completely phased out by $145,000
Also, while the first-time homebuyer’s tax credit cannot be taken by anyone who is not a U.S. citizen, the repeat homebuyer’s tax credit can be taken by non-citizens as long as they are not non-resident aliens, meet the residency test, and are within the income limits.
If you are purchasing a home jointly with a spouse, both spouses must meet the residency test described above. If you are purchasing a home with someone who is not your spouse, either of you can claim the credit, and you can allocate it between yourselves if you both meet the residency test and income limits. You also do not need to sell your previous home in order to take this credit; as long as you are using the new home as your primary residence now, you can rent out the old home.
When might I have to repay the tax credit?
You must live in the new home as your principal residence for at least three years in order to avoid paying back the credit. If you move before that, you may be required to pay back the credit. The rules are the same as for the 2009-2010 first-time homebuyer’s credit, listed above.
If you were stationed outside the United States between January 1st, 2009 and April 30th, 2010 for 90 days or more, you’re actually still eligible to get this credit (as of April 2011). Members of the military, foreign service, or intelligence service can still get the first-time or repeat homebuyer tax credit if they purchase a home by April 30th, 2011 and you must close on the home and receive title by June 30th, 2011. The rules are the same as for the 2009-2010 first-time homebuyer’s credit and the repeat homebuyer’s credit as listed above.
Buying a home is usually a good investment especially in the best real estate markets, and is an even better one if you bought it between 2008 and 2010. When filing your taxes, make sure you take advantage of the home buyer tax credits.
Did you buy a home in 2008-2010? How much of an influence did that first-time or repeat home buyer tax credits have on your decision?