What is the Homebuyer Tax Credit and How Does It Work?

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Understanding the homebuyer tax credit is a must for any prospective homebuyer. Repeat homebuyers, thanks to recently passed legislation, have the ability to receive up to $ 6,500 in tax credits.

In this article, we'll explore several facets surrounding the tax credit, including qualifying criteria, timelines in which the credit can be claimed, and potential benefits. For many consumers in this struggling economic climate, the credit could be a strong contributing factor in the decision to buy a new home.

What exactly is a tax credit? A tax credit will either reduce a taxpayer's federal tax bill, or increase their tax refund, on a dollar to dollar basis. For example, let's say you owe $ 10,000 on your taxes, but you receive $ 8,000 tax credit. After the credit is reduced to $ 2,000 ($ 10,000- $ 8,000). Alternatively, if you owe $ 2,000 in taxes – and with the same $ 8,000 tax credit – you would see a tax refund of $ 6,000. When the homebuyer tax credit was initially created in 2008, it was treated as a low interest loan – in other words homebuyers were expected to pay back the credit over time. However, the legislation passed in 2009 did away with this payback feature – now, homebuyers do not have to pay the credit as they continue to do so ,

First Time Home Buyer Credit Extended

On November 6, 20009, President Obama signed into law the Worker, Homeownership and Business Assistance Act of 2009. The main purpose of this law is to extend the first time homebuyer tax credit set to expire on November 30th, 2009. The declared goal of the US government, in creating this credit, is to stimulate the housing market and provide a much needed spark to the economy.

With the new law in place, eligible homebuyers can receive a tax credit of up to 10% of the home purchase price, with a maximum credit of $ 8,000. To claim the credit on their tax returns, homebuyers must purchase, or enter into a binding contract to purchase, a "principal residence" on or before April 30, 2010 and close on the home by June 30, 2010. The term principal residence simply means that, for those people who own multiple houses, the home is purchased. A "first time home buyer" is defined as "who owns a principal residence during the three-year period prior to the purchase". For married couples, both spouses must meet this requirement.

Qualifications for First Time Homebuyer Tax Credit

To qualify for the first time homebuyer tax credit per the most recent legislation – the following criteria must be met:

  • Homebuyers do not have to be a principal residence during the three-year period prior to the purchase. As mentioned above – if married, both spouses must meet this requirement
  • The homebuyer must have a contract in place before April 30th, 2010, and the deal must be close before June 30th, 2010
  • Purchase price of the new home can not be more than $ 800,000
  • The following income requirements apply: For single tax filers, the credits phase out between $ 125,000 and $ 145,000 of adjusted adjusted gross income. For married couples the range is $ 225,000 to $ 245,000. For the average person, adjusted gross income equates to the adjusted gross income
  • Homebuyers can not buy a home from a blood relative or descendent-nor may a person claim the credit if the home is from a spouse or the spouse's blood relatives
  • The new home must be used as principal residence for at least the next three years after date of purchase.
  • Homebuyers may not take the tax credit if they are claimed as a dependent on someone else's return

Key Benefits

  1. First-time homebuyers will receive a credit of up to 10% of the home purchase price, with a maximum credit of $ 8,000
  2. Homebuyers who purchase their home in 2009 can claim the credit on either their 2008 or 2009 returns, while those who purchase their home in 2010 can use either their 2009 or 2010 returns
  3. For military, foreign service, and intelligence personnel who are serving on the US "official extended duty" for at least 90 days during 2009 and the first four months of 2010, the law will allow an extra year to take advantage of the tax credit

Tax Break for Repeat Homebuyers

The law enacted on November 6, 20009 added a tax credit for repeat buyers. A person who has lived in a residence for five consecutive years during the previous eight years can qualify for a credit of as much as $ 6,500. The new home does not have to cost more than the old one.

To illustrate this scenario, let's take example of a person who lived in a home from 2002 until 2007, and then ceased to be a homeowner. You may be eligible for a $ 6,500 tax credit if you are new to a home. The basic qualification criteria from the first time homebuyer tax credit apply.

Additional Resources

More information about the tax credit can be found at irs.gov. A qualified tax advisor can therefore be a resource for additional questions and determine if you qualify.

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Source by J Newton