Included in the Housing and Economic Recovery Act of 2008 is the “First-Time Homebuyer Credit” for a primary residence purchased between April 8, 2008, and December 1, 2009.

2008 Credit

First-time homebuyers can take a credit equal to ten percent (10%) of the purchase price, up to a maximum of $7,500, on the purchase of a primary residence. However, the credit must be repaid over a 15-year period, beginning in 2010, thus it is more like an interest free loan, than a true tax credit.

The credit can be used to reduce the taxpayer’s overall tax liability or increase their refund, dollar-for-dollar. Significantly, this credit is “fully refundable” meaning that it will be paid to all eligible taxpayers regardless of whether they owe any taxes or the credit is higher than their actual tax liability.

2009 Credit

For 2009, the first-time homer buyer’s primary residence must be purchased between January 1 and December 1, 2009, but the limit was increased to a maximum $8,000 for the same ten percent (10%) rate. In addition, provided the purchased home remains the taxpayer’s primary residence for at least three years following the purchase date, the 2009 credit does not have to be repaid.

If the purchase is closed before April 15, 2009, the buyer may claim the 2009 credit on their 2008 tax return. However, if the closing occurred after April 15, then the credit must be claimed on the taxpayer’s 2009 return. Note: The taxpayer may still claim a purchased closed after April 15, 2009, on their 2008 tax return if they submit an “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return” (Form 4868) or by filing an Amended Tax Return (Form 1040-X) at a later date. This credit is claimed using the “First-time Homebuyer Credit” (Form 5405).

Note: If the taxpayer is married, filing separately, they only receive half the maximum credit in either year.

IRS Notice 2009-87, dated October 1, announced the filing deadline for this credit was extended to October 15.

Eligibility

A “First-time Homebuyer” is a taxpayer who has not owned another primary residence during a three year period prior to the purchase date of the home on which the credit is claimed. Anyone, including a spouse, who owned a primary residence during this period is ineligible for the credit.

While a dependent can be the first-time homebuyer claiming the credit, simply using a minor child’s name does not make an otherwise ineligible taxpayer then eligible to take the credit. Generally speaking, a bona fide sale of a property cannot be made to a minor, therefore a minor dependent does not qualify as a first-time buyer.

For purposes of the credit, owning a primary residence outside of the U.S. within the last three years does not disqualify the taxpayer as a First-time Homebuyer.

Taxpayers cannot take the credit if any of the following conditions are true:

- the home is not the primary residence

- the home is sold before the end of the year

- their MAGI exceeds the maximum limit, based on their filing status

- the home is purchased from a close relative (i.e. spouse, parent, grandparent, child or grandchild)

- the purchase is financed from tax-exempt mortgage revenue bonds (Does not apply for 2009)

- the taxpayer owned a primary residence during the three years prior to purchasing the new home

- the taxpayer is or was eligible for the District of Columbia First-time Homebuyer Credit for any tax year (Does not apply for 2009)

- the taxpayer is a non-resident alien

Income Limits

The First-time Homebuyer Credit is phased out, then eliminated for taxpayers with high Modified Adjusted Gross Incomes (MAGIs).

For taxpayers filing as “Married, Filing Jointly,” the full credit is given for those with MAGIs of $150,000 or less, is gradually reduced for higher incomes and then eliminated at a MAGI of $170,000. For other taxpayers, the full credit is granted for those with MAGIs below $75,000, gradually reduced, then eliminated for those with MAGIs of $95,000.

Qualified Residences

Any home utilized as the taxpayer’s primary residence and situated in the U.S. qualifies for the credit, provided it is purchased within the dates specified above. If the home is built by the taxpayer, the first day of occupancy is considered the purchase date for purposes of this credit.

The definition of home includes mobile homes, whether the land it is on is owned or leased, and travel trailers, provided it is affixed to the land.

Recreational Vehicles (RVs) with built-in motors are not affixed to land and so do not qualify for the credit. However, ownership of an RV does not disqualify the taxpayer from being considered a first-time homebuyer. Vacation homes and rental properties do not qualify as primary residences for purposes of this credit.

Rental Property

Even if part of a primary residence is being rented out, the taxpayer may still qualify for the credit, provided they meet the requirements as a first-time homebuyer.

For multi-unit or multi-family properties, only the portion of the property used as the taxpayer’s primary residence qualifies for the credit. The full value of the multi-unit property cannot be used in calculating the credit, rather only the cost of the taxpayer’s unit can be used to determine the credit.

Taxpayers Affected by Hurricane Katrina or other disasters

Under Section 121 of the IRS Code, the definition of a First-time Homebuyer is a taxpayer who has not had an ownership interest in a primary residence during the three years prior to the purchase of a new primary residence. Therefore, if a taxpayer’s primary residence became uninhabitable because of Hurricane Katrina or other natural disaster and they have not sold the uninhabitable residence nor purchased a new residence during a three year period, they still qualify as a First-time Homebuyer.

Repaying the Credit

If the taxpayer takes the First-time Homebuyer Credit in 2009, then stops using the home as their primary residence and/or sells it within three years from the purchase date, repayment of the full amount of the credit taken is then due. The repayment will be assessed as additional tax on that year’s tax return. Additional information on repayment of the credit is contained in the instructions for “First-Time Homebuyer Credit” (Form 5405).

Additional information can be found in “Your Federal Income Tax for Individuals” (IRS Publication 17) and the instructions for Form 5405. Taxpayers should also consult with their CPAs, professional tax preparers or other tax practitioners for information specific to their situation.

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