All About the Federal First-time Homebuyer Tax Credit

Here are some key points about the First-time Homebuyer Tax “Credit”.  It’s not really a credit, but an interest-free loan that must be repaid within 15 years. 

Effective Date

Applies to purchases made on or after April 9, 2008, and on or before June 30, 2009.

Amount of Credit

10% of the cost of the home, not to exceed $7,500.  This is calculated per property, not per individual.

Eligible Properties

Any single family home (inlcuding condos, co-ops, townhomes) that will be used as a principal residence.

Refundable

The tax credit reduces income tax liability for the year of purchase and can be claimed on your tax return for that tax year.

Income Limit

Full amount of credit may be available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return).  The first-time homebuyer tax credit phases out above those caps (at $95,000 and $170,000 respectively). 

For example, if a married couple had an income of $165,000, their credit would be reduced by 75% as shown:

Couple’s income: $165,000

Income Limit: $150,000

Excess Income: $15,000

The excess income amount (in this case, the $15,000) is used to form a fraction.  The numerator of the fraction is the excess income amount.  The denominator is $20,000 (specified by the statute).   In this example, the disallowed portion of the credit is 75% of $7,500, or $5,625. ($15,000/$20,000 = 75%.  75% x $7,500 = $5,625).  Stated another way, only 25% of the credit would be allowed. 

First-time Homebuyers Only

Purchaser (and purchaser’s spouse) must both be first-time home buyers.  Definition of first-time homebuyer in this circumstance: Both purchasers may not have owned a principal residence in the 3 years prior to purchase.

Recapture

A portion of the credit (1/15th)  must be repaid each year for 15 years.  If the home is sold before 15 years, the remainder of the credit is recaptured upon the sale.  If the person who utilized the credit dies before the full credit amount has been repaid, then any balance that remains will be disregarded. 

Repayment

The mechanics are not yet specified.  Repayments for credits claimed on 2008 tax returns will go into effect for the 2010 tax year.  As a practical manner, repayments of credits taken in 2008 will not actually start until 2010 returns are filed in 2011.  Repayments of credits claimed on 2009 returns will go into effect for the 2011 tax year and and reflected on 2011 returns filed in 2012.

Impact on District of Columbia Home Buyer Credit

D.C. credit is not available if purchaser uses this credit.  They must choose one or the other.

Restrictions Related to Financing

If the financing is obtained by means of mortgage revenue bonds, (i.e., through a tax exempt bond related financing program offered by a state housing agency), then the purchaser is not eligible for the tax credit.  This may affect VHDA loans.

Interaction with Alternative Minimum Tax

Can be used against Alternative Minimum Tax (AMT), so credit will not throw individual into AMT.

How to Obtain the Credit

There is no pre-purchase authorization, application, or similar approval process.  Eligible purchasers will simply claim the credit on the appropriate IRS Form 1040 and/or on any special forms the IRS might devise.  In many, if not most cases, the IRS will be on notice that a purchase has occurred because the settlement officer at the time of purchase is required to report the transaction.

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