Congress has created a new but temporary tax credit to provide incentive to first-time homebuyers. The $8,000 credit will be available for the purchase of a principal residence purchased before December 1, 2009.
1. How does the tax credit work?
Anyone who qualifies as a first-time homebuyer and buys a primary residence between now and December 1, 2009 will be eligible for a tax credit of up to $8,000 or 10% of the purchase price, whichever is lower. This is an attractive benefit because a tax "credit" is deducted directly from the amount of tax that is owed in a given year.
2. Who can use the new tax credit?
Only first-time homebuyers are eligible to use the credit. A first-time homebuyer is defined as someone who has not had an ownership interest in a principal residence in the previous three years.
3. Is there an income restriction?
Yes. No more than $75,000 for individuals and $150,000 for married couples filing jointly. The credit is gradually phased out as incomes exceed these amounts.
4. Are there restrictions related to the financing for the mortgage on the property?
No. The revised bill eliminated the exclusion associated with the NC Bond financing.
5. How do I apply for the credit?
There is no pre-purchase application or approval process. Eligible purchasers simply claim the credit on the IRS tax return.
6. Can I use the credit amount as part of my downpayment?
No. There is no mechanism available for claiming the credit any earlier than the 2008 tax filing which will be filed in 2009.
7. So there's no way to get any cash flow benefits before I file my 2008 tax return?
A first-time homebuyer may wish to modify their income tax withholding or adjust their estimated tax payments. Their withholding would decrease and their take-home pay would increase. Estimated tax payments would make similar adjustments.
8. If I don't make an eligible purchase until 2009, do I claim the credit when I file my 2009 tax return in 2010?
You'll have a choice. If you purchase between January 1, 2009 and before July 1,2009, you are permitted to make an election to treat the purchase as if it had occurred on December 31, 2008. This election allows you to claim the credit on your 2008 return that is due April 15,2009. You may also elect to file your return after April 15th by filing for an automatic extension and claim the credit on the extended 2008 return. If you file the 2008 return before you have purchased the home, you can file an amended return after the purchase. Of course, you will always have the option of claiming the credit for the 2009 purchase on your 2009 return that will be filed in 2010.
9. What if I sell my house before the 15-year repayment period is complete?
Any of the amount of credit that has not been repaid will be due in the year of sale and deducted from the sale proceeds.
10. What if there's very little gain (or even a loss) on the sale and the proceeds won't cover the repayment amount?
If the gain on sale is less than the amount that must be repaid, part of the liability is forgiven, and the seller would not be required to repay the IRS the shortfall. If there was no gain or even a loss, then the unpaid balance would not be repaid.
