Thursday, June 18, 2009

Home Buyer Tax Credit

The new-and-improved version of the First-Time Homebuyer Credit offers rookie home buyers (or those who simply haven't owned a home in the past three years) a chance to get a federal income tax credit of up to $8,000. Thanks to this year’s Stimulus Act, you don't have to repay the credit like you did with last year’s version.

Even better, the IRS says unmarried individuals can team up on a home purchase and then share the credit. If you're thinking of going this route, here's what you need to know to get the best tax-saving results:

How Much You'll Get
The updated First-Time Homebuyer Credit can be applied to purchases of homes that occur between Jan. 1, 2009, and Nov. 30, 2009. The maximum credit equals the lesser of 10% of the purchase price of a principal residence or $8,000. Or, in the case of married individuals who file separately, $4,000. (These amounts are up from the $7,500 and $3,750 limits for purchases that occurred between April 9 and Dec. 31 of last year.)

There are some catches, however. The credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high. (For this purpose, MAGI means the adjusted gross income figure reported on the last line on page 1 of your Form 1040 increased by certain income from outside the U.S. that is exempt from taxation.)

For married joint filers, the credit is phased out when the MAGI is between $150,000 and $170,000. For unmarried individuals and married individuals who file separately, the credit is phased out between MAGI of $75,000 and $95,000.

You can use the credit to offset your entire federal income tax bill, including any alternative minimum tax (AMT). Since the credit is refundable, you can collect any amount left over after your tax bill has been reduced to zero in cold, hard cash.

The credit is only available to buyers who have not owned a principal residence in the U.S. during the three-year period that ends on the purchase date for the home. That home must serve as the new principal residence.

If you’re married, both you and your spouse must pass the three-year test (whether or not you file jointly). If you’re unmarried, and you team up with another person to buy a home that serves as the new principal residence for you both and you both pass the three-year test, then you can share the credit. If only one of you passes the three-year test, only that person can claim the credit.

Unmarried Buyers Can Share the Credit
Say two (or more) unmarried individuals buy a home together that serves as their new principal residence. Assuming each person passes the three-year test and they jointly own the property as tenants in common or as joint tenants, they can pretty much share the credit any way they choose, according to IRS Notice 2009-12. However, the total credit is still limited to the lesser of 10% of the purchase price or $8,000. And the credit allocated to each person is still subject to the phase-out rule, based on MAGI. Although the IRS doesn’t actually say so, it appears you can’t claim a credit that exceeds your share of the purchase price (including your share of any mortgage debt). Here’s an example to illustrate the possibilities.

Example: Say you and your significant other jointly buy a home for $150,000 in June of this year and you both pass the three-year test. You pay 60% of the cost, and your partner pays 40%. The available credit for this purchase is $8,000 (lesser of 10% of the purchase price or the $8,000 credit ceiling). You and the other person could agree to share the credit 60/40 to reflect your shares of the purchase price. But if the other person's MAGI is too high to claim the credit and yours is not, then it makes good tax-saving sense to have the entire $8,000 allocated to you. On the flip side, if your MAGI is too high, the entire $8,000 could be allocated to the other person. Or you could split the credit 50/50, or 75/25, or 25/75, or whatever allocation suits the two of you best. Anything you decide is OK with IRS.

Word of Caution: Credit Must Be Repaid in Some Circumstances
Under last year’s version of the First-Time Home Buyer Credit, those who bought homes between April 9, 2008, and Dec. 31, 2008, were generally required to repay the credit over 15 years. The Stimulus Act eliminated the repayment rule -- in most cases. However, the repayment rule can still hit you if you sell the home you buy in 2009 within three years of the purchase date or stop using the home as your principal residence during that time. If either of those events occurs, you generally must repay your entire credit when you file your Form 1040 for the year during which the triggering event occurs (no 15-year repayment deal for you).

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