What Every First-Time Homebuyer Should Know About the Federal Tax Credit

By: Kelsi Kelly & Kelly Vang

The housing industry is a critical part of today’s current economic condition. Housing accounts for 16 percent of the U.S. economy. Since the recession, over 6 million jobs were lost, 1 million of which are in housing construction and associated fields. This has also caused the housing inventory to reach 4 million homes. Therefore, the government has formed the homebuyer tax credit to improve the housing industry and recover the market. (NAHB, 2009)

With The Worker, Homeownership, and Business Assistance Act of 2009, President Obama has extended the first time homebuyer tax credit, allowing first-time buyers an extended tax credit that can exceed up to $8,000. The new time frame is November 7, 2009 to April 30, 2009 (Realtor, 2009). This pertains to sales that are signed by May 1, 2010 and have until the end of June 2010 to actually close the transaction (Mullins, 2009). First time homebuyers are classified as people who have not owned a principle residence in the past three years (Realtor, 2009). The tax credit asserts income limits as follows:

After 11/06/09
Single taxpayers: $125,000
Joint taxpayers: $225,000

On/after 01/1/09; on/before 11/06/09
Single taxpayers: $75,000
Joint taxpayers: $150,000

Individuals whose income is beyond the limit may receive partial tax credit. The first-time home buyer tax credit is a part of the American Recovery and Reinvestment Act of 2009. After the success of the first part of the tax credit for first time homebuyers, people were pushing for an extension of the date to allow more people to qualify for the credit; the new tax credit lengthens the deadlines and income limit; however on the downside document requirements are more stringent (IRS, 2009).

Homeowners have the opportunity to get a tax credit if they have lived in their home for 5 years in the past 8 years and will receive up to a $6,500 tax credit for a house they purchase between November 7, 2009 and April 30, 2010 (Realtor, 2009). Now with more additions to the act, there are plenty of people who qualify for the tax credit. The home being purchased must be the primary residence and be up to $800,000 (Realtor, 2009).

The tax credit is calculated by the owner’s income and 10 percent of the purchase price of the home not surpassing $8,000 (Realtor, 2009). The tax credit does not need to be paid back if the owner lives in the home for three or more years after; if owner sells it before three years, then they will have to pay it back (Realtor, 2009). According to a California Association of Realtors research, 40 percent of first-time homebuyers surveyed said they would not have purchased a home without the federal tax credit and 70 percent said the tax credit was very important in deciding to buy a home at this time (Netchaev, 2009).

This tax credit can be claimed on the purchaser’s federal income tax. It is important for the buyer to complete an IRS Form 5405 to first verify their tax credit quantity and make sure they meet the criteria before they claim the tax credit total on their 1040 tax return form, indicated on line 67.

Other essential details buyers should know about the tax credit is:

-You can only claim tax credit once
-You have to be a US resident to claim tax credit
-You can go to the state housing finance agency to access the money allocable to the tax credit more rapidly instead of waiting to file their tax return; this fund can then be use as a down payment for the home and/or for closing costs
-You must be over 18 years old
-You may also qualify for the tax credit, if you construct your own home-If you are married and if either you or your spouse has previously purchase a home, the tax credit does not apply (IRS, 2009).

The tax credit has proven to have a good economic impact; it has strengthened the housing demand and encourages the economy revitalization. The National Association of Home Builders (NAHB) has generated an economic analysis which has indicates the economic benefits the homebuyer tax credit will have on the country within the time frame of one year:

•”Increases home purchases by 383,000
• Increases housing starts by 8,000
• Create nearly 350,000 jobs
• Generate $16.1 billion in wages and salaries and $12.1 billion in business income, and
• Yield tax revenues of $8.4 billion for the federal government and $3.2 billion for state and local
Governments (NAHB, 2009)”

In summary, now is the perfect time to be a part of the American dream with purchasing a home with a great incentive from the government. Homes are more affordable than ever, and with so many house varieties (inventory) to choose from, builders as well as sellers are offering big discounts, while mortgage rates are historically low; this is definitely a buyer's market. For a better understanding of the extended tax credit for first time homebuyers, you can view the following video : http://www.youtube.com/watch?v=nPNEk14qvo0

References:
1.IRS. (2009). First-Time Homebuyer Credit. 2009. www. Irs.gov. Retrieved on 11/28/09 at http://www.irs.gov/newsroom/article/0,,id=204671,00.html.
2. Mullins, Luke. (2009). Expanded First-Time Home Buyer Tax Credit Becomes Law. Retrieved on 11/28/09 at http://www.usnews.com/money/blogs/the-home-front/2009/11/06/expanded-first-time-home-buyer-tax-credit-becomes-law.html.
3.Realtor. (2009). The Basics: Extended Home Buyer Tax Credit 2009/2010. 2009. http://www.realtor.org/. Retrieved on 11/28/09 at http://www.realtor.org/home_buyers_and_sellers/2009_first_time_home_buyer_tax_credit. 4. NAHB. 2009. Homebuyer Tax Credit Proposal: Economic Impact Analysis. 2009. http://www.nahb.org/. Retrieved on 11/28/09 at http://www.nahb.org/fileUpload_details.aspx?contentID=127117.
5. Netchaev, Irina. 2009. $8000 first time homebuyer tax credit extended…awaiting Obama’s signature. Retrieved on 12/2/09 from http://www.irina4realestate.com/8000-first-time-home-buyer-tax-credit-extended-awaiting-obamas-signature/.