Frequently Asked Questions on the $8,000 Tax Credit

On Tuesday, February 17th, 2009, the American Recovery and Reinvestment Act of 2009 was signed, authorizing an $8,000 federal tax credit for qualified first-time home buyers purchasing a home on or after January 1, 2009 and before December 1, 2009. The following are some frequently asked questions that can help you understand the benefit of this new tax credit and why now is the best time to buy.  If you're a first-time home buyer, the time has never been better to find the home of your dreams. Contact me today to schedule a consultation and begin the successful road to home ownership. Who is eligible to claim the $8,000 tax credit? First-Time homebuyers purchasing any type of owner-occupied home are eligible for the "tax credit". To qualify, a home must be purchased on or after January 1,2009 and before December 1, 2009. The purchase date is considered the closing date. The taxpayer's "Modified Adjusted Gross Income (MAGI) is limited to $75,000 for single taxpayers and $150,000 for married taxpayers. There are some partial tax credits available if the MAGI exceeds the limits. (See below). What is a tax credit? A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means a taxpayer who owes $8,000 in federal income taxes, and who receives a $8,000 tax credit, would owe nothing to the IRS. If the taxpayer owes $1,000 in federal income taxes and uses the new tax credit, they would receive a $7,000 refund. This type of tax credit is called a "refundable" credit. The tax credit is "refundable". What does that mean? The fact that the tax credit is "refundable" means the home buyer's credit can be claimed even if the taxpayer has little or no federal income tax liability to offset the credit. Typically this involves the government sending the taxpayer a refund check for a portion or even all of the amount of the refundable tax credit. What is the definition of a "first-time home-buyer?" The new law defines "first-time home-buyer" as a buyer who has not owned a principal residence during the three-year period prior to purchase. For married taxpayers, the law tests the home history of both the home buyer and his/her spouse. If one does not qualify, then the married couple does not qualify. What type of home qualifies? Any home purchased by an eligible first-time home buyer will qualify for the credit, provided the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes and attached homes like condos and townhomes. If the home is modestly priced, is the tax credit still $8,000? Generally, for home buyers purchasing a home priced less than $80,000 the tax credit is equal to 10% of the purchase home price. Therefore, a first-time home buyer purchasing a home for $65,000 would receive a $6,500 tax credit. What is the "Modified Adjusted Gross Income" (MAGI)? "Modified Adjusted Gross Income" (MAGI) is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" (AGI). On IRS Form 1040 and 1040A, AGI is the last number on page 1 and is the first number on page 2 of the form. For Form 1040EZ, AGi appears on line 4. After you have the AGI, add certain amounts such as foreign income, foreign housing deductions and deductions for higher education costs. Questions about the taxpayer's MAGI should be directed to your tax preparer, CPA, or attorney. If my Modified Adjusted Gross Income (MAGI) is above the limit, do I qualify for any tax credit? Maybe. It depends on your income. Partial credits of less than the $8,000 are available for some taxpayers whose MAGI exceeds the phase-out limits. The credit becomes totally unavailable for individual taxpayers with a MAGI of more than $95,000 and for married taxpayers filing joint returns with a MAGI of more than $170,000. As an example of the "phase-out", assume a married couple has a MAGI of $160,000 ($10,000 above the $150,000 limit). Dividing the $10,000 overage by $20,000 ($20,000 is the set number for this calculation single or married taxpayers(s)) equals 0.5. When you subtract the 0.5 from 1, that gives you 0.5. To determine the amount of partial credit, multiply $8,000 by the 0.5 and you have $4,000. That's the partial credit allowed in this example. Do I have to repay the tax credit? No. If the taxpayer lives in the home as their principal residence for a minimum of three years, there is no repayment. If the taxpayer fails to live in the property for the three year period, the entire amount of the tax credit is recaptured upon sale of the property. What paperwork is required prior to or at the Closing? None. At this time, the paperwork required to claim the tax credit will be completed by the taxpayer or their tax preparer for their tax return filing.

Q&A Economic Stimulus Act and FHA Loans

Question: I've been hearing a lot about the Economic Stimulus Act of 2008. One section mentioned that the limits for FHA loans have been raised in some areas. Can you tell me more about this?

Answer: The Economic Stimulus Act was signed into law in February 2008. It temporarily increased loan limits for FHA fixed rate mortgages above the standard or "conventional" limit of $417,000.
The reason for this increase was to make home ownership more affordable in high cost areas where housing is particularly expensive. California and Hawaii are two states with FHA designated high-cost areas.
If you're planning to buy a home in a high cost area this year, or are considering refinancing your adjustable rate mortgage , these "FHA Jumbo" loans could save you a considerable amount of money. This is because FHA loans generally offer low interest rates than non-FHA loans. You'll also enjoy lasting peace of mind, as the loans fixed rate won't go up for the life of the loan. And if you're buying a home, you can take advantage of FHA loans' down payment options.
This temporary increase expires December 31, 2008, so contact me today to find out more.

source: Andrew Becher, MetLife Home Loans

Home Improvements That Pay

Many big home improvement projects - once thought to be largely recouped upon sale - are losing some of their value as the real estate market continues its slump. Here are some projects that are still returning much of their original cost.

• Curb appeal projects such as new vinyl or fiber cement siding, as well as new windows are bringing higher returns than before.
• Local and regional trends matter. Backup power generators are a better investment in the Southwest than in the Northeast, for example. Consult real estate agents and appraisers and go to open houses to get the best sense of what improvements pay in your area.
• Some projects can lower your insurance bill. Electrical and plumbing upgrades, for example, can lower rates by 10% to 20% - see if your insurer offers discounts for wind, hail and fire resistant roofing; water leak detection and shut off valves; hurricane shutters; seismic gas shut off valves; backup generators; and central station burglar and fire alarms.
• Hire a home inspector and make any necessary repairs first. In many states it is illegal to conceal defects.

sources: NAR: Remodeling magazine; Chubb Group of Insurance Cos.; Burns & Wilcox

Tax Credit to Aid First-Time Homebuyers; Must be Repaid Over 15 Years

WASHINGTON — First-time homebuyers should begin planning now to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.

Available for a limited time only, the credit:

• Applies to home purchases after April 8, 2008, and before July 1, 2009.
• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.

If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the credit.

Q. Which home purchases qualify for the first-time homebuyer credit?
A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home.

Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.
If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

Q. How much is the credit?
A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

Q. Are there income limits?
A. Yes. The credit is reduced or eliminated for higher-income taxpayers.
The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income—for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

Q. Who cannot take the credit?
A. If any of the following describe you, you cannot take the credit, even if you buy a main home:
Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.

• You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
• You stop using your home as your main home.
• You sell your home before the end of the year.
• You are a nonresident alien.
• You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.

Your home financing comes from tax-exempt mortgage revenue bonds.
You owned another main home at any time during the three years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.

Q. How and when is the credit repaid?
A. The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
• If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
• If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
• If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.

Source: IRS Newsroom: http://www.irs.gov/newsroom/article/0,,id=186831,00.html

Welcome to my blog

Hello and welcome to my new blog. This tool will be a resource for you as you look to buy and sell your home. Here I'll post links to articles, market reports and new listing updates too. So bookmark the site and return soon.