The American Recovery and Reinvestment Act of 2009 which was recently extended by Congress until April 30, 2010 provides a tax credit (which, unlike a tax deduction, gives you a dollar-for-dollar set-off against your taxes) of up to $8,000 for homebuyers who are “new” buyers and up to $6,500 for homeowners who already own a home and are relocating to another home (even in the same neighborhood).
Not everyone is entitled to the credits; you have to be “ qualified” in three respects. First, your income cannot exceed specified levels (discussed below); second, your new home (and, if you currently own a home, the home in which you now live) must be your “principal residence” (defined below); and third, the contract to buy must be signed not later than April 30, 2010 with the closing not later than June 30, 2010.
The rules as to just what constitutes a principal residence are not hard-and-fast, and all of the India of residency come into play.
Generally, your principal residence will be the home where you spend the majority of time. But this isn’t the only test. Other relevant factors include but are not limited to:
- Your place of employment
- Where your family lives
- The address you use on your tax return
- The address you use for your general mail, particularly for bills
- Where you maintain your bank accounts and banking relationships
- Where you maintain your memberships (such as country clubs, health clubs, etc.) and religious affiliations
- Where you are registered to vote
- The address on your driver’s license
- The property on which you claim your homeowners property tax exemption (many states and counties allow for the payment of lower property taxes on your principal residence)
The Act defines a “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. In other words, you can still be a “first time” home buyer ( eligible for the $8,000 credit instead of the $6,500 “move-up”credit) even if you previously owned a home, so long as it was sold more than 3 years ago.
For those who currently live in their own home and are relocating, the home must have been a principal residence for 5 consecutive years out of the last 8 years.
For married taxpayers, the law tests the home ownership history of both the home buyer and his/her spouse. This means that if you (individually) have not owned a home in the past three years but your spouse owned your home which was your principal residence, ( say, for estate planning purposes) neither you nor your spouse qualifies for the first-time home buyer tax credit. On the other hand if, for example, you’re recently married, and you rented but your spouse owned his or her home and resided in it for 5 years as his/her principal residence, then, as a couple, you meet the requirements as a “move-up” buyer.
Here are some of the other things you should know about the credit:
- Condos, Coops, Brownstones and Single Family dwellings (some multi-family as well) all qualify. But note that you cannot purchase a home from your spouse or from lineal family members (parents, grandparents, children, grandchildren) and receive the credit. However, a purchase from siblings, nieces, nephews, uncles, aunts, cousins and step-relatives is OK.
- The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000 or $6,500 as the case may be.
If a single purchaser’s “adjusted gross income” (i.e., total income less specified exclusions from income) is $125,000 or less, the full amount of the credit is available. If adjusted gross income is more than $125,000 but less than $145,000, the credit is reduced incrementally until it is entirely lost at the $145,000 level. For married couples filing a joint return the full credit is available if adjusted gross income is $225,000 or less. The phase out for this this group begins once the couple’s combined adjusted gross income reaches $225,000 and is completely lost at $245,000.
According to the IRS, if one spouse earns below the income limits but the other spouse’s income when combined with that of the first spouse would take the couple over the limit, the credit would still be available. The lower earning spouse can obtain the credit by purchasing the property in his/her individual name and filing a tax return in the status of “married, filing separately”. But be careful. Estate planning and other tax consequences might dictate that you not proceed in this way and you should consult with your tax and estate advisers. Also bear in mind that total ownership by one spouse may have consequences in the event of a divorce.
- The 2009 home buyer tax credit differs from the tax credit that Congress enacted in 2008. The most significant difference is that the 2009 credit does not have to be repaid. But note that while the 2009 tax incentive is a true tax credit there will be a recapture of the tax credit amount if, with limited exceptions, a home buyer does not use the residence as a principal residence for at least three years.
- Home buyers who believe they qualify for the tax credit needn’t wait to file their 2009 or 2010 tax returns to recognize the benefit. You are permitted to reduce your income tax withholding (up to the amount of the credit) so that, for example, you can accumulate cash by raising your take home pay. This money can then be applied to the down-payment – or can be used for anything else. Also, the tax credit for a home purchased in 2009 or 2010 can be applied against your 2008 or 2009 tax return with the result that you’ll recognize the financial benefit up to a full 12 months sooner than you otherwise would have recognized it if you waited until filing your 2009/2010 tax returns (in 2010 and 2011).
