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Home Buyer Credit

First Time Homebuyer Tax Credit

What is the Credit:

A credit against income tax is available in the year of purchase, of principal residences, for first time homebuyers within the US, for an amount of 10% of the purchase price or a maximum credit of $7,500 for 2008 and $8,000 for 2009.

The availability and time of the credit is confusing because of the political pressure asserted on congress after the credit was published. Originally, the property had to be purchased after April 9, 2008 and before July 1, 2009 and the credit had to be paid back over 15 years (actual loan in the form of tax credit).

Congress then changed the law and decided the credit did not have to be paid back if the property was purchased after December 31, 2008, and the taxpayers retained the property as their principal residence for 36 months following the purchase date. The time of the purchase to qualify for the credit was also extended to December 1, 2009, and then again to May 1, 2010. For 2009, taxpayers may also elect to report the credit on their 2008 tax returns, for a residence purchased prior to July 1, 2009.

Who is a First Time Homebuyer:

A “first-time homebuyer” is defined as any individual that had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.

  1. The three year limitation also applies to the spouse of the homebuyer

What is a Principal Residence:

  1. A principal residence is defined as in Internal Revenue Code Section 121 (Exclusion of gain on sale) where the residence is owned and used by the taxpayer as his/her personal residence.
  2. A taxpayer who uses a portion of a property for residential purposes and a portion of the property for business purposes is treated as using the entire property as the taxpayer’s principal residence (Rev Rul 2005-14)

What is a Purchase:

A purchase is defined as an acquisition that is not from a related party or inherited.

Limitations Applied to the Credit:

  1. The purchase must be on or after April 9, 2008, and before May 1, 2010 to qualify for the credit under the law.
    (1) Exception in case of binding contract.  In the case of any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, paragraph (1) shall be applied by substituting "July 1, 2010" for "May 1, 2010".
  2. Ceiling Dollar limit of $8,000
  3. Adjusted gross income phase-out of $75,000 or $150,00 for a joint return
  4. The property cannot be sold in the year the credit is taken, so a taxpayer cannot buy a personal residence to obtain the credit and then sell the property before the end or the taxable year.
  5. The IRS does not address the issue of owning rental properties, however, there does not appear to be any restrictions for taxpayers that own rental properties from taking the credit, as long as the taxpayer did not own a principal residence within the last three years.
  6. You cannot acquire your home from a related party or through inheritance
  7. The credit is not available to nonresident aliens

 (Amendment for 2010) Special rule for long-time residents of same principal residence. In the case of a taxpayer to whom a credit under subsection (a) is allowed by reason of subsection (c)(6), subparagraphs (A), (B), and (C) shall be applied by substituting "$ 6,500" for "$ 8,000" and "$ 3,250" for "$ 4,000". Confusing new change to the law, read IRC Section 36 below to get a complete explanation.

Reporting and Taking the Credit:

  1. The taxpayer must file form 5405 with their tax return in the year the credit is taken.
  2. If the property is purchased prior to July 1, 2009, the taxpayer may elect to take the credit in the 2008 tax year.


    INTERESTED IN READING THE LAW FOR YOURSELF? Read IRC Sec 36