News on Homebuyer Tax Credit Extension and Expansion

On November 6, 2009, President Obama signed a bill to extend the tax credit for first-time homebuyers through June 30, 2010. The bill also opens up opportunities for others who are not buying a home for the first time. In this article, I'll give an overview of this tax credit.

Once again, a first time homebuyer, someone who has not owned a home within the last three years may be eligible for the credit. The credit for the first time homebuyer is 10% of the purchase price of the home, with a maximum available credit of $8000. Single taxpayers and married taxpayers filing a joint return may both qualify for the full tax credit.

A tax credit is a direct deduction in tax liability owed by an individual to the IRS. And, in the event the homebuyer owes no taxes they are then owed this credit, which means the IRS will issue a check for the amount of the tax credit. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home is sold at any time in the first 36 months, and is no longer the individual’s primary residence. However, if you are “qualified military personnel,” the 36 months does not apply.

Another change to the extension of the tax credit is the income cap. The amount of income someone can earn and qualify for the full amount of the credit has been increased. Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single tax filers who earn $145,000 and above are ineligible. Joint tax filers who earn up to $225,000 are eligible for the total credit amount. As the joint tax filer, you may receive a partial credit if you earn above $225,000 but below $245,000. Over $245,000 you become ineligible.

The new deadlines are as follows: To be qualified for the credit, all contracts need to be in effect no later than April 30, 2010, and they must close no later than June 30, 2010. If the buyer is “qualified military personnel,” the deadline is April 30, 2011.

The maximum allowed home purchase price is $800,000, which won’t be as useful to move-up buyers in high-cost areas.

When and how does this affect a buyer’s 2009 and/or 2010 tax return? Another nice advantage of this extended credit is that the buyer can claim the credit on their 2009 taxes, even if the purchase is made in 2010.

A big addition to this bill is that of the tax credit for “qualified existing homeowners” to buy a new primary residence (or have one built). The homeowner must have owned their existing home for five of the last consecutive eight years. Second homes don’t qualify for the credit. The deadline, income qualifications and maximum allowed home price remain the same.

All of this is positive news for the housing market. The National Association of Realtors says that as many as 400,000 resale transactions (1.2 million for both new and resale homes) were completed at this point in the year because of the first-time buyer credit.

The one big concern I had when reviewing the tax credit, its extension and expansion was how were “WE” going to pay for it. I was glad to see that President Obama in his speech on November 6th from the Rose Garden stated, “…now, it’s important to note that the bill I signed will not add to our deficit. It is fully paid for, and so it is fiscally responsible. It builds on the Recovery Act that’s already saved or created over 1 million jobs, and it will lead to even more in the weeks and months ahead.”

I have had students asked me, “How does this affect me as an investor?” If you have been in my class or heard me speak you know one of my biggest mantras – WHO IS YOUR END USER? If you are quick-turning (trading) properties, then this credit gives your end user an incentive to be a buyer now and get off the side lines.

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