Basics of the 2009 First-time Home Buyer Credit

In 2009, as part of the economic recovery plan, Congress passed the American Recovery and Reinvestment Act of 2009. Included in this bill, is a provision for the 2009 First-time Home Buyer Credit. The goal of this credit is to give some Americans assistance in affording their first home and to stimulate the housing market and overall economy. The following questions and answers will explain the basics of this credit.

Who is eligible?

Any U.S. resident who files a U.S. tax return and buys a house between January 1, 2009 and December 1, 2009 can include IRS Form 5045 to claim the credit. Provided the house will be their principal residence and they have not owned a principal residence in the last three years, they are eligible. In the case of married couples, neither spouse is permitted to have owned a primary residence in the three prior years.

What homes are eligible?

A home is defined as a single family detached home, townhouse, condominium, mobile or manufactured home, or houseboat. Vacation homes are not eligible. Rental properties are not eligible unless you are renting out part of your principal residence while also living there. The home can be either new or resale and the date of purchase is determined by the closing date and transfer of ownership.

The home cannot be bought from your children or grandchildren, parents or grandparents, or from your spouse. It cannot be bought by a corporation or partnership in which the taxpayer holds more than fifty percent ownership. The home must be located in the Unites States.

Homeowners who build a new home on a previously owned or new lot are eligible providing the date of first occupancy falls between January 1,2009 and December 1, 2009.

How much is the credit?

For homes costing more than $80,000, the maximum allowable tax credit is $8,000. Married couples, filing jointly, and single taxpayers may claim the maximum of $8,000. For married couples filing separately each taxpayer may claim a maximum tax credit of $4,000.

For houses costing less than $80,000 the allowable tax credit is ten percent of the purchase price for all taxpayers. Married couples, filing jointly, and single taxpayers may claim all the allowable tax credit. For married couples filing separately, each party may claim half the allowable tax credit.

In some cases, the taxpayer can apply to have this credit used for closing costs, but very few lenders have chosen to set up this part of the program.

What are the income limits?
Note: This section is based on information from the IRS website.

The credit is phased out for higher income taxpayers. The income test is based on MAGI (modified adjusted gross income). The phase-out amount is $20,000 for all taxpayers. The phase-out range for married couples filing a joint return is $150,000 to $170,000. The phase-out range for all other taxpayers is $75,000 to $95,000. So, married couples filing jointly with MAGI less than $150,00 and all other taxpayers with MAGI less than $75,000 are eligible for the full tax credit subject to the $8,000 cap and the other requirements mentioned in the above paragraphs.

Those taxpayers with MAGI's in the phase-out ranges are eligible for a partial tax credit. The partial tax credit is calculated as follows:

For a married couple filing jointly:

Assume the house they bought is more than $80,000 and they qualify for the full $8,000 tax credit. If their MAGI is $160,000 their partial tax credit would be $4000.

Couple's MAGI of $160,000
less phase-out start amount of $150,000
equals $10,000

Divide the $10,000 difference by the phase-out amount of $20,000 and subtract the result from one.

10,000 / 20,000 = .5

1 - .5 = .5

Apply this percentage to the full tax credit of $8,000 and the result is the partial tax credit.

$8,000 x .5 = $4,000.

This couple would be able to claim a $4,000 partial tax credit.

For all other taxpayers, the calculation process is the same. Assume a single taxpayer bought a house for more than $80,000, and he qualifies for the full $8,000 tax credit. If his MAGI is $86,000, the partial tax credit would be $3,600.

Taxpayer's MAGI of $86,000
less phase-out start of $75,000
equals $11,000

Divide the $11,000 difference by the $20,000 phase-out amount and subtract the result from one.

11,000 / 20,000 = .55

1 - .55 = .45

Apply this percent to the full tax credit of $8000 and the result is the partial tax credit.

8,000 x .45 = $3,600

This taxpayer would be able to claim a $3,600 partial tax credit.

A link to IRS Form 5045, which can be used to calculate the credit, is found on this page.

How do I amend my 2008 tax return?

In 2008, Congress passed a similar tax credit rule included in The Housing and Economic Recovery Act of 2008 for homes purchased between April 8, 2008 and December 1, 2009. Many of the provisions are the same, but the 2008 tax credit has to be repaid in fifteen equal installments starting in 2010. If you claimed the 2008 tax credit for a house built in early 2009, you can file an amended return to take advantage of the 2009 tax credit that does not have to be repaid.

You will need to file a 1040X amended return and pay any outstanding taxes. You may need to consult a tax professional for help with this return. You should file this return as early as possible, so the matter is settled before you file your 2009 taxes.

These are the basics of the First-Time Home Buyer Tax Credit of 2009. Facts have been checked at the "www.irs.gov" website Keep in mind if you visit these IRS web pages that many of them pertain to both the 2008 and 2009 tax credits and IRS Form 5045 is used for both the 2008 and 2009 tax credits.

Sources:

IRS First-time Home Buyer Credit page

IRS First-Time Homebuyer Credit Q & A: Basic Information page

IRS First-Time Homebuyer Credit Q & A: Homes Purchased in 2009 page