Home buyer credit new definitions, limits

UPDATE: On Nov. 6, Obama signed the bill
extending and expanding the first-time home buyer credit. Read more on the final tax credit in
The home buyer credit's three E's

The House just voted to approve the Senate's latest changes to the first-time home buyer credit. Since the tax break is tied to unemployment benefits, Obama should sign it into law any time now.

Yes, Capitol Hill is still calling it the first-time home buyer credit, even though some folks who currently own residential real estate can now benefit from the new soon-to-be law. More on that in a minute.

I hit the highlights in my post yesterday, but today waiting for the vote, I was actually sifting through the Joint Tax Committee's explanations of H.R. 3548, or as lawmakers have dubbed it the Worker, Homeownership, and Business Assistance Bill of 2009.

While it won't ever make a best-seller list, it does contain some interesting passages.

A tax break by any other name: First, the semantics of first-time home buyers. As we all learned when this tax break was created in 2008, our federal legislators like to play Merriam-Webster.

Under the 2008 credit (which really wasn't a credit, but an interest-free loan available via tax filing; again, lawmakers having fun with definitions) and also per the tweaks made in the American Recovery and Reinvestment Act in February 2009 (where it actually became a true credit), a person is considered a first-time home buyer as long as he or she hadn't owned a principal residence during the three years before buying a (or another) house.

Now in H.R. 3548 we get a second definition in the U.S. Congress Never Abridged Tax Dictionary for first-time home buyer:

An individual (and, if married, the individual’s spouse) who has maintained the same principal residence for any five-consecutive year period during the eight-year period ending on the date of the purchase of a subsequent principal residence is treated as a first-time home buyer.

That, unfortunately, leaves the hubby and me out of tax credit luck. We bought our current Austin home when we moved here in 2005, but we won’t hit the five-year mark until next July, after this tax credit extension expires.

Of course, Congress might once again extend it, despite the pronouncement by Sen. Johnny Isakson, R-Ga., one of the credit's biggest champions that "this is probably the last extension." Lawmakers will be in the midst of what looks to be a hard-fought 2010 campaign year and could always use some perceived voter goodwill and added political action committee money.

But as I've said many times, I'm not ever moving again (especially after our massive repairs) so I don't even know why I'm pondering credit possibilities.

Smaller credits for newest first-timers: The downside for already-owning-first-time buyers is that the credit is only $6,500 (or $3,250 for a married individual filing separately).

The "real" first-time buyers as defined under the law could get a credit of up to $8,000 or 10 percent of the home’s purchase price, whichever is less.

More limits added: Lawmakers also made an interesting adjustment to the credit limitations.

In the current iteration, which expires on Nov. 30, the credit amount applies regardless of whatever you pay for your home.

If, for example, you as a first-time buyer pick up a nice place for $1 million, you still only get to claim an $8,000 credit since 10 percent of your new estate’s price is $100,000, well above the current cut-off amount.

Now, however, the law says you can't even apply for the first time credit if your residence's purchase price is more than $800,000.

The extension of the credit also continues phasing out the tax break for folks who make over a certain amount. Until Nov. 30, that's taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) in the year of the house purchase.

Under the extension, the phase out applies to first-time buyers with modified AGI of $125,000 and $145,000 ($225,000 and $245,000 for joint filers).

So why add a limit on the real estate's price, too? I guess lawmakers want to make double sure that folks who seemed wealthy, either via their big earnings or high-dollar homes, don't get the tax break.

It also takes those folks out of the eight grand tax give-back pool, which should save Uncle Sam a little bit of money.

Special consideration for military: Men and women in uniform get even more time to buy and claim the credit. It would be available until June 30, 2011, for service personnel stationed outside the United States for at least 90 days.

Fraud safeguards: The home buyer credit extension also includes some provisions that we all hope will put an end to the cheating going on with regard to this tax break. They include:

• The taxpayer must be age 18 on the date of purchase. A married taxpayer who is younger than that meets the age requirement if his or her spouse is 18.
  
• The property cannot be bought from a person related to the taxpayer who wants to claim the credit. If you're married, that means you can't buy the home from your spouse's relatives either.
  
• No credit is allowed to a home purchaser who is a dependent of another taxpayer.
• To get the credit, a properly executed copy of the home purchase settlement statement must be attached to the tax return.
  

The new credit bill also give the IRS the ability to assess additional tax without issuing a notice to the taxpayer if the agency determines that the taxpayer:

• No longer lives in the home so the credit must be paid back;
  
• Doesn't meet the age requirement to claim the credit;
  
• Included information on a prior tax return (at least one of the two preceding tax years) that indicates the filer is ineligible for the credit; or
  
• Didn't submit with the return a properly executed copy of the home purchase settlement statement.

Tallying the costs: I can already see the good times taxpayers and the IRS are going to have administering this sucker!

Part of the fun will be added administrative costs. That includes money the IRS will spend to make sure the filings are correct. I'm OK with that. The agency needs to do its job properly.

It's also likely to cost taxpayers a bit more in filing costs, especially if they use a preparer. Those folks will have to make sure their clients get the right info to Uncle Sam, which means it will take them more billable hours.

Again, no complaints from me. A good tax pro is worth the money.

But what about the general taxpaying public's cost? Extending and expanding the home buyer tax credit is projected to cost the government almost $11 billion in lost taxes over the next decade.

I doubt this tax break will generate nearly enough in home sales to ever pay for itself. In fact, real estate experts say it won't reduce inventory. What it will do, they say, is keep home prices up. That's all fine and well for sellers, but not so good for buyers.

At least one lawmaker has been reading my mind.

"For the vast majority of cases, the home buyer tax credit amounted to a free gift since it did not affect their decision to purchase a home," said Sen. Kit Bond, R-Mo. "And for the small minority of buyers whose decision was directly caused by the credit, this raises the question of whether we are subsidizing buyers who may not have been able to afford buying a home in the first place."

Comments

[Diane]

I have a purchase agreement signed on Sept 2009, but I have a contengience contract with the seller. If I sale the house before june 30, 2010. Can I qualify for the move-up/repeat home buyers tax credit?

[Debbie]

We purchased our house on Nov. 6, 2009. Why wouldn't it take effect the day of the signing? It just breaks my heart to think we lost $6,500 by one day. Is there any thing we can do?

[Kay]

Movers,
Welcome home! You file Form 5405 with your return. However, if you're not going to be buying for a few months, you might miss the deadline. You must have a contract in place by April 30.
Kay

[Movers]

Hello! First of all- thank you for the great information! I was trying to get some info about this but it was so hard to find someone who could explain it in a way I could understand :) Me and my family are planning to move back o the states in a few months and we were thinking of buying a property, where do we apply for the credit? Dose it even apply to us- as we lives abroad for the last 3 years.I hope I didn't bother you too much with my question.

[Jaimee]

My husband owned the condo we live in now when we got married in January 2005 and the title was in his name. I had lived there since 2004 before we got married. It wasn't until 2008 when we refinanced that we both appeared on the mortgage and title. Do we still qualify for the requirement stating "you (and your spouse if married) previously owned and used the same main home for any 5 consecutive year period?

[Villanova PA Real Estate]

I've being researching about Homes and reading your blog, I found your post very helpful :) . I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog!

[John]

How about this one. I have lived with my Fiance' in our home for 3 years. We wanted to refinance during this credit period. I technically bought the home from her. I have never owned a home before... and we are not married. I talked to the IRS many times over the past 20 weeks... they stated I was in a possible referral process. Anyway.. I guess I am wondering if I still qualify. I technically fall within the confines of the credit.

[todd]

I closed on a house on 10-28-09 and lived in my prior residence for 9 years. Am I eligible for the credit under the new law recently signed? If not, is there any hope?

[Kay @ Don't Mess With Taxes]

Maria,
Yes, the move-up credit applies to homes under contract or closed on after Nov. 6, i.e. under contract on Nov. 7, 2009, through April 30, 2010 or closed on by June 30, 2010.

[maria torres]

Can you tell me if you have to purchase the MOVE UP home after Novermber 6 to get 6,500.00 credit?

Thanks!

[Laura George]

"For the vast majority of cases, the home buyer tax credit amounted to a free gift since it did not affect their decision to purchase a home," said Sen. Kit Bond, R-Mo. "And for the small minority of buyers whose decision was directly caused by the credit, this raises the question of whether we are subsidizing buyers who may not have been able to afford buying a home in the first place." This paragraph really hit home. My son bought a home thinking he could get the credit, thus paying of his truck and four wheeler and could afford the monthly payment. He was denied because of lacking only '5 days' to make up the three years of owning a home to qualify as first time homebuyer. He thought it had been 3 years when the signed the contract. Now he is stuck with making the payment and still has to make his truck and four wheeler payment and he is drowning and will probably lose the house. He is trying to sell the four wheeler but so far hasn't been able to and the house payments still come around every month. The government should make some allowance for people who really need it. He is raising his two kids on his own because he got custody of them in his divorce. Now they will have to move to a rent house and may never get the opportunity to buy again.