Homebuyer Tax Credit

On November 6, the President signed into law the ''Worker, Homeownership, and Business Assistance Act of 2009.''  The new law extends the tax credit for first-time homebuyers as well as making the credit available to current, existing homeowners.  These changes could it make it easier for you to buy or sell a home.  The changes also aim to improve residential real estate markets nationwide. 

Homebuyer credit basics. Only the purchase of a main home located in the U.S. qualifies.  Vacation homes and rental properties are not eligible.  The homebuyer credit reduces one's tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund.  For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.

The new law makes four important changes to the homebuyer credit:

(1) New lease on life for the homebuyer credit.  Before the new law was enacted, the homebuyer credit was available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009.  The credit has been extended to apply to a principal residence bought before May 1, 2010 (including a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010).  The extra two-months (May and June of 2010) help buyers who find a home but can't close on it before May 1, 2010.

The maximum allowable homebuyer credit for first time homebuyers is $8,000, or 10% of the residence's purchase price, whichever is less.

(2) The homebuyer credit may be claimed by existing homeowners.  For purchases after November 6, 2009, the homebuyer credit can be claimed if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date you buy the subsequent principal residence.  There's no requirement for your current home to be sold to qualify for the homebuyer credit. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold.

The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500, or 10% of the subsequent principal residence's purchase price, whichever is less.

(3) The homebuyer credit is available to higher income taxpayers.  Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.  For purchases after November 6, 2009, the credit phases out over higher AGI levels. For individuals, the phase-out range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

(4) There's a new home-price limit for the homebuyer credit.  For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed if the purchase price exceeds $800,000.  It's important to note there is no phase-out mechanism.  A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.  The new purchase price limitation applies whether you are buying a first-time principal residence or a replacement principal residence.

What hasn't changed.  The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence.  Thus, if you buy a qualifying principal residence in 2009 and can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.