$8000 First Time Homebuyer Tax Credit: the fine print

We would advise, before you run outside screaming, “I need to buy a house! I need to buy a house! This $8000 won’t last!” Read the fine print, particularly question 9.

From the California Association of Realtors Website (verbatim):

A.  FIRST-TIME HOMEBUYER TAX CREDIT

Q 1.  What, in a nutshell, is the $8,000 tax credit for first-time homebuyers under the new law?

A  A first-time homebuyer as defined may receive a refundable tax credit up to $8,000 for purchasing a principal residence in the U.S. from January 1, 2009 to November 30, 2009, inclusive (see Questions 5 to 16).  No repayment is required if the buyer owns and occupies the property for 36 months (see Question 17).  This new law enhances the preexisting $7,500 tax credit enacted in 2008 which still applies for purchases from April 9, 2008 to December 31, 2008 (see Questions 18 and 19).

Q 2.  How will the new $8,000 tax credit affect REALTORS® and their clients?

A  The new $8,000 tax credit provides a monetary incentive for first-time homebuyers to purchase homes.  First time homebuyers represent a significant segment of U.S. homebuyers.  According to the U.S. Department of the Treasury, nearly half of the homebuyers in 2008 were first-time homebuyers.  Hence, the new tax credit for first-time homebuyers, along with affordable home prices and historically low mortgage rates, should help spur the housing market.
 
Q 3.  What is a tax credit?

A  A tax credit is a dollar-for-dollar reduction of tax owed.  In contrast to a tax credit, a tax deduction is merely a reduction of taxable income.  Hence, a tax credit is generally more valuable to the taxpayer than a tax deduction.  To illustrate, an $8,000 tax deduction for a taxpayer in a 25% tax bracket would only save the taxpayer $2,000 in taxes, whereas an $8,000 tax credit would save the taxpayer $8,000 in taxes.

Q 4.  What is the significance of a “refundable” tax credit?

A  That a tax credit is “refundable” means that any credit amount not used to reduce the tax owed may be added to the taxpayer’s tax refund check.  In other words, a taxpayer may receive a tax credit even if he or she has no tax liability to offset that credit.

As an example, let’s say a taxpayer filing his tax returns on April 15 would have owed $2,000 to the IRS.  If the taxpayer can now claim an $8,000 refundable tax credit, he can expect to receive a refund check from the IRS for $6,000.

Q 5.  Who is eligible as a “first-time homebuyer” for the $8,000 tax credit?

A  For purposes of the $8,000 tax credit, a “first-time homebuyer” is defined as any individual (or spouse) with no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which the tax credit applies (26 U.S.C. § 36(c)(1)).  For income restrictions, see Question 9.

As an example, an unmarried buyer who closes escrow on a purchase on June 30, 2009, would qualify as a “first-time homebuyer” as long as the buyer did not own a principal residence during the period from July 1, 2006 to June 30, 2009.  Even if the taxpayer owned another principal residence in the past, he or she can still qualify as a “first-time homebuyer” as long as the taxpayer transferred off title to that other home over three years ago.

Q 6.  What constitutes a “principal residence” under the $8,000 tax credit?

A  A “principal residence” is generally the home the taxpayer lives in most of the time (26 U.S.C. § 121).  It can be a house, condominium, townhome, manufactured home, or similar type of property located in the U.S.  To qualify for the federal $8,000 tax credit, the property can be new construction or a resale.  It cannot, however, be a vacation home or rental property.

Q 7.  What constitutes a “purchase” to be eligible for the $8,000 tax credit?

A  A “purchase” for purposes of this tax credit is defined as any acquisition, except as set forth in Question 15 (26 U.S.C. § 36(c)(3)).  For a home that the taxpayer constructs, the purchase date is the date the taxpayer first occupies the home (26 U.S.C. § 36(c)(3)(B)).

Because a purchase is defined as an acquisition, it generally occurs when escrow closes and title to the property transfers to the buyer, and not when the underlying purchase contract is signed.  To illustrate, a buyer who enters into a contract to purchase a property on November 13, 2009, but closes escrow on December 23, 2009, would not qualify for the $8,000 tax credit because, based on the law as it is currently written, acquisition does not occur before the law expires on November 30, 2009.

Q 8.  How is the amount of the tax credit calculated?

A  The maximum tax credit for an individual first-time homebuyer is 10 percent of the purchase price, not to exceed $8,000 (26 U.S.C. § 36(b)(1)(A)).  For married individuals filing separate tax returns, the tax credit is capped at $4,000 (26 U.S.C. § 36(b)(1)(B)).

For a purchase price over $80,000, as is often the case in California, the first-time homebuyer tax credit will be capped off at $8,000.  “Purchase price” under this law is defined as the adjusted basis of the principal residence on the date such residence is purchased (26 U.S.C. § 36(c)(4)).

Q 9. Is there an income restriction to be eligible for the $8,000 tax credit?

A  Yes.  The first-time homebuyer tax credit may be restricted by the taxpayer’s income.  The tax credit starts to phase out for an individual taxpayer with a modified adjusted gross income from $75,001 to $95,000 (or $150,001 to $170,000 for joint filers).  The tax credit is eliminated entirely if an individual’s modified adjusted gross income is over $95,000 (or $170,000 for joint filers).  (26 U.S.C. § 36(b)(2

Q 10.  What is a modified adjusted gross income?

A  First, a modified adjusted gross income or MAGI is a taxpayer’s adjusted gross income (AGI) plus certain items, such as IRA deductions, student loan deductions, higher education costs, foreign income, and foreign housing deductions, among other things.  Second, an adjusted gross income (AGI) is a taxpayer’s gross income minus certain deductions, which are often called “above the line” deductions.  Most tax deductions are “above the line” deductions, except itemized deductions from Schedule A and personal exemptions.
 
Q 11.  When must a first-time homebuyer purchase a property to qualify for the $8,000 tax credit?

A  To be eligible for the $8,000 tax credit, a first-time homebuyer must purchase a principal residence from January 1, 2009 to November 30, 2009, inclusive (26 U.S.C. § 36(f) and (h)).  The deadline is November 30, 2009, and not December 31, 2009.  That the deadline is not at the end of the year may work as a trap for unwary buyers.

For the first-time homebuyer tax credit for acquisitions from April 9, 2008 to December 31, 2008, see Question 18.

Q 12.  When can a taxpayer claim the $8,000 tax credit?

A  According to an IRS announcement on February 25, 2009, first-time homebuyers who qualify for the $8,000 tax credit by purchasing a home before December 1, 2009 have a special option of claiming the tax credit on either their 2008 or 2009 tax returns (IR 2009 14).

Q 13.  Does a married person qualify for the $8,000 tax credit if his or her spouse has owned a principal residence in the last three years?

A  No.  For a married taxpayer to qualify for the $8,000 tax credit, both spouses must be “first-time homebuyers” as defined in Question 5.  In other words, neither spouse qualifies for the $8,000 tax credit unless both of them have not owned a principal residence over the last three years.

Q 14.  Are two unmarried individuals both eligible for the first-time homebuyer tax credit if they buy a house together?

A  Yes.  Two or more unmarried individuals can buy a principal residence together, but the maximum tax credit for all of them is only $8,000.  If all co-owners qualify as first-time homebuyers, they must allocate the $8,000 tax credit between themselves in any reasonable manner.  According to the IRS, a reasonable method is any method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit (see IRS Form 5405).

Q 15.  Who cannot claim the first-time homebuyer tax credit?

A  The first-time homebuyer tax credit is not allowed under any of the following circumstances:

•  The property is acquired from a related person as defined (26 U.S.C. § 36(c)(3)(A)) (see Question 16);

•  The property is acquired by gift or inheritance (26 U.S.C. § 36(c)(3)(A));

•  The buyer is a nonresident alien (26 U.S.C. § 36(d)(1)); or

•  The buyer disposes of the property (or the property ceases to be the principal residence of the buyer and, if married, the buyer’s spouse) before the end of such taxable year (26 U.S.C. § 36(d)(2)).

Q 16.  What acquisitions from related persons do not qualify for the first-time homebuyer tax credit?

A  A buyer is ineligible for the first-time homebuyer tax credit if the property is acquired from certain related persons, including, but not limited to, the following:

•  The buyer’s spouse, ancestors (such as parents and grandparents), or lineal descendants (such as children or grandchildren);

•  A corporation in which the buyer owns more than 50% of the outstanding stock; or

•  A partnership in which the buyer owns more than 50% interest.

(26 U.S.C. § 36(c)(3)(A) (citing §§ 267 and 707).)

Q 17.  Is a first-time homebuyer required to repay the $8,000 tax credit?

A  No, the tax credit need not be repaid if the buyer owns and occupies the property for at least 36 months.  If, however, the buyer disposes of the property or it ceases to be the buyer’s principal residence within 36 months of purchase, the buyer may be required to repay the tax credit (26 U.S.C. § 36(f)(4)).  This includes situations where the buyer sells the home, converts it into a rental property or business, or the home is destroyed, condemned, or disposed of under threat of condemnation.  In these situations, the tax credit must generally be repaid by including it as additional tax for the year the home ceases to be the buyer’s principal residence (26 U.S.C. § 36(f)(4)(D)).

Q 18.  What is the $7,500 first-time homebuyer tax credit for a principal residence purchased in 2008?

A  With certain exceptions, a first-time homebuyer may receive a 10% tax credit not to exceed $7,500 for purchasing a principal residence from April 9, 2008 to December 31, 2008 (26 U.S.C. § 36(a) and (b)).  This tax credit was enacted as part of the federal Housing and Economic Recovery Act of 2008.  As with the $8,000 tax credit discussed above, the $7,500 tax credit phases out if an individual’s modified adjusted gross income exceeds $75,000 (or $150,000 for joint filers) (26 U.S.C. § 36(b)(2)).  The $7,500 tax credit phases out completely if an individual’s modified adjusted gross income exceeds $95,000 (or 170,000 for joint filers) (26 U.S.C. § 36(b)(2)).

The $7,500 tax credit must generally be repaid like an interest-free loan in equal annual installments over a 15-year period, or in full if the homebuyer sells the property for a gain (26 U.S.C. § 36(f)).  For example, to repay a $7,500 tax credit for 2008, about $500 should be added to the buyer’s income tax liability every year for 15 years starting 2010.

Q 19.  What are the major differences between the new $8,000 tax credit and the previous $7,500 tax credit?

A  The $8,000 tax credit is $500 more and applicable to first-time homebuyers who purchase a principal residence from January 1, 2009 to November 30, 2009.  The $8,000 tax credit need not be repaid if the buyer stays in the property for 36 months.

On the other hand, the $7,500 tax credit applies to first-time homebuyers who purchased a principal residence from April 9, 2008 to December 31, 2008.  The $7,500 tax credit must generally be repaid over 15 years.

Q 20.  How does a first-time homebuyer apply for the tax credit?

A  A first-time buyer may claim the tax credit on their federal tax returns using IRS Form 5405, which is available at http://www.irs.gov/pub/irs-pdf/f5405.pdf.

44 thoughts on “$8000 First Time Homebuyer Tax Credit: the fine print”

  1. Would I qualify if my Dad, who owns his home, is Co-signing with me? FHA loan? His name is above mine in the contract, does than make any difference?

  2. Would I qualify if my Dad, who owns his home, is Co-signing with me? FHA loan? His name is above mine in the contract, does than make any difference?
    P.S. – Sorry, forgot to tell you great post!

  3. Hi,

    Just wanted to clarify a point. I thought that one of the qualifications for this $8000 tax credit was the fact that you have to purchase a new home (a home in which no one has lived before).

    However, Que 6 states “To qualify for the federal $8,000 tax credit, the property can be new construction or a resale.”

    If that is indeed the case it’s excellent news for us, but I just want to make sure that purchase of older homes still falls within the guidelines.

  4. I bought my home in July of 2008 and filed for
    the $7500 tax credit already. I heard somewere that the dates for claiming the $8000 credit has changed. If anyone bought their first home after April of 2008 they can now claim the $8000 instead of the $7500. Is this
    true and can I amend my tax return and still get the $8000 now?

  5. Can you please explain why a married couple where only 1 was a (in past 3 years)homeowner, cannot even claim 1/2 of the Credit, however, an unmarried couple can, in same situation, can claim full credit? My understanding is even if you filed separate returns, being married disqualifies you from the credit. Without proper explaination, this really feels like discrimination. ???

  6. My understanding is that a mobile home without a permanent foundation is considered personal property. Therefore, if one sells a mobile home in a park with a rented space they would still qualify for the $8000 first time home buyer credit correct?

  7. Vper- I spoke to IRS friday to ask about that myself, word is if you owned anything that you lived in (even a camper as long as it had a cooking area and bathroom) that you would not be qualified. So mobile homes, house boats and even RV’s ( if you owned and lived in it as primary residence ) in last 3 years disqualify you. Interestingly enough, if you had a rental property or a vacation home but say rented an appartment for primary living you still qualify if this new place becomes your primary residence. Apparently the key is “primary residence owned” over last 3 years before purchase.

  8. ANSWER TO QUESTION BY:
    By K.M. on Mar 9, 2009 | Reply

    Would I qualify if my Dad, who owns his home, is Co-signing with me? FHA loan? His name is above mine in the contract, does than make any difference?

    I HAD THE SAME QUESTION FOR A CLIENT – HE QUALIFIED AS A FIRST-TIME HOMEBUYER BUT HIS MOM CO-SIGNED ON HOME. I CALLED IRS – THEY SAID AS LONG AS CO-SIGNER DOES NOT QUALIFY FOR CREDIT, PURCHASER IS ELIGIBLE FOR FULL CREDIT.

  9. Mike,
    Great article on the fine print. My husband, who is a real estate agent, was just asking if a first-time homebuyer can qualify with a co-signer. Thank you for the information.

  10. We are buying a house using only my husband’s name on the mortgage, because of my bad credit, but we file our taxes together. Would we still qualify for the full 8000 credit, or only 4000?

  11. I wanted clarification on how “primary residence” is determined. I just purchased a home, but am not moving to the new home yet as I am currently working in another city (potentially transferring with same company). As a result of this, my loan was processed as a “second home” for the time since I was not able to get a transfer letter before closing, but the home should be my primary home within the next few months. I’m just not sure given that it is a bit grey area for me whether or not I would qualify for the credit if I did meet the income qualifications. Could someone confirm this for me? Thanks.

  12. Hopefully somebody can answer my questions. I recently purchased a home. The house is a double with two apartments. I will be living in half of the house, so the house will be my primary residence. Do I qualify for all of the $8,000? Thanks for your help.

  13. My wife and I are going to purchase a home in conjunction with our daughter and son-in-law. They have not owned a home for over 3 years. Assuming a $500000 purchase price and 50-50 ownership it is my understanding that the daughter & son-in-law would qualify for the $8000 credit (assuming they meetall other qualifications, which they do).

    In addition to posting could you copy lynnperey@olanmills.com

  14. I am an American citizen living in Canada. I bought a home here in 2005. I am going to be leaving Canada and buying a home in the US this year. Will my out of country home ownership disqualify me for the first-time buyer tax credit or will the program consider me a first time buyer because I have never owned property in the US?

  15. My boyfriend and I want to buy a house. His dad is older and has recently put the older home he lives in for 20 + years, in my boyfriend and his brother’s name. Does my boyfriend qualify as a “first time home buyer?”
    We are looking to purchase a home in a couple of months.

  16. This is what I have found – by this deffinition if in your state the mobile is considered personal property and is taxed as such then you should be able to take the credit. I have had others tell me the oppisite “According to regulation § 1.121-1, to be a principal residence, property must first be used as a residence. Facts and circumstances determine whether property is used as a residence. The regulation notes that “a houseboat, a house trailer, or the house or apartment that the taxpayer is entitled to occupy as a tenant-stockholder in a cooperative housing corporation” may be a residence, but personal property that is not a fixture under local law is not included.

  17. If two unmarried, unrelated individuals buy a house together and one of them is a first time home buyer but the second individual owns another property, can the first time home buyer qualify for the $8,000 tax credit? If so, would any portion of the money need to be repaid if the two buyers married a year later?

  18. I see where Form 5405 states you do not qualify if “7. You acquired your home by gift or inheritance,” however this is not clear. Does this mean if I get help for the down payment in the form of a financial gift I do not qualify, or does this mean if one inherits the actual house one does not qualify for the tax credit?

  19. If two unmarried individuals buy a house together, and one is a first time buyer but the other is not, can the one who is a first time buyer claim the $8,000 tax credit?

  20. Hi,

    I inherited 1/2 of a mobile home and land back in 1995. I had to take a personal loan out, not a home loan to acquire my brothers half of the mobile and the property, my dad did not have a will. The mobile home and land was in my name only and I acquired all of this before marriage. After I married I never put my husband on my home or land which the home is not on a permanent foundation. Here is Nevada this mobile not on a permanent foundation is considered personal property. We purchased a home about 6 months ago and I am struggling to find out if we qualify for the first time home buyer tax credit. My accountant doesn’t even know, he keeps finding conflicting information on the stubject. Does anyone know where I can find the correct answer to this dillema?

  21. I am in the process of getting divorced. I am also purchasing a new home. My soon to be ex spouce did own a property for three years and still does. I, have never owned a home and am truly a first time home buyer. Will I qualify for the tax credit since I will be closing on my new home after my divorce is final, but within the cut off time?

  22. My wife and I bought a new home in march. We upgraded from a mobile home that we had lived in for the last 11 years. Do we qualify for ANY tax credit? I have heard from several people that having owned a mobile home will not disqualify us. I have called H&R Block (who has did my taxes this year) and my tax person stated that I did not qualify, but I know several people who have upgraded from mobile homes who got the tax credit. Please help!

  23. My husband and I purchased a house from my father in October 2009. We file joint tax returns and are both first time home buyers. I know that I do not qualify since I bought the house from a related person (my dad) however my husband is only related by marriage. I have heard their is a loophole as long as we closed prior to November 6, 2009. Is this true?

  24. I am a co-signer for my sister home that is not my principal residence. I do not own any other property and I want to buy a house that is going to be my principal residence. Do I qualify as a First time buyer for the $8,000 tax credit?
    Thanks,
    J. Gonzalez

  25. Tony – You would definitely qualify for the $6,500 credit that was recently passed for homeowners that have owned their primary residence for the past 5 years.

    According to http://www.IRS.gov, “the new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time homebuyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.”

    The real question is whether or not you can qualify for the $8,000 credit as a first-time homebuyer. Some people are claming that because your mobile home may be treated as personal property (and subject to property tax rather than real estate tax in some states/counties) you would be considered a first-time buyer. The IRS states that a primary residence includes basically anything that has eating, sleeping, and toilet facilities. This means that mobile homes and houseboats count as a “primary residence.” It is my opinion, as a CPA, that if you owned a mobile home and a purchasing a new primary residence, that you do not qualify for the $8k credit, but can qualify for the $6,500 credit.

    There is a lot of gray area to this matter, and not a lot of guidance. Hope that helps!

  26. hi, my dad is the primary borrower on the mortgage for my mobile home which i have made the payments on (and lived in ) for past 7 years. my husband and i purchased a home in august of this year. do we qualify for anything?(as i am on the loan also for the mobile home)

  27. I bought a home back in Jan of 2009 with my daughter I was told to keep my daughter off of mortgage application since he just started a job. But i was told to add her to the deed right after the closing which i did. Since I know I am not entitled to the credit because i own a home in the past 3 years. But would my daughter be entitle to the credit

    Thanks Michael

  28. Sarah,

    I heard the same thing, but I can’t find much about it. My wife and I bought a house from her grandma in October, and we’re trying to figure out if I qualify for the credit. Have you found any more info about it?

    Thanks,

    Ryan

  29. Hello me and my brother will be cobuying home for my mom…i’m a first time homebuyer…this will be my brothers second time buying a home..do i or both of us..or neither qualify for first time home buyer tax credit…thanks

  30. We bought a duplex with a partner in 2009, which means there is ONE purchase/deed only. However we both occupy one of the two dwellings separately as our “main home”. My questions is can both of us claim our own credit (max to $8000) based on each dwelling’s price ? Or we could only claim one credit and allocate the $8000?

  31. I “purchased” a home with my brother back in 2004. We bought it for a dollar from my great uncle. This past March my wife and I bought a new home together and my brother and his wife bought us out of the house my brother and I owned. My wife and I were married in August of 2008 and she never changed her address to the home my brother and I owned. Do we qualify for any type of tax credit?

  32. My wife and I purchased a new home from my in-laws.They never lived in it an it wasn’t their primary house.I bought it out-right;like buying it from a stranger.I paid for everything.Their was no loss or gain during the purchase.why an I discriminated against for doing the right thing?

  33. I purchased a new RV in 2009, not owning a home for over three years. I live in the RV full-time and have leased a space for one year. Does this qualify for the first-time credit. I don’t own any other property.

  34. Just to clarify – I have read directly from the IRS website that RVs, as long as they have a motor directly attached, do not disqualify you. However, I am trying to determine if a “motor home” without a foundation would disqualify, which from your post it seems to…

  35. I have just heard the new rules to claim the 8,000 dollar tax credit has new higher income levels to be eligible for it. I do not think this is fair because we bought our house in august 2009 and when we cashed in our IRA to buy it, it caused our income to go over the level at that time. Is there any way I could still qualify for it because with the the new levels of income we are eligible for it. I called the IRS, they said it was because of the purchase date, we could not. This seem like discrimination to me. How about you?

  36. I had been living in my partner’s home but had no ownership interest or mortgage obligation in the property. New job required a move to FL this year, so I started looking for a condo as a qualified first-time homebuyer. To help fund my downpayment, my partner refinanced his house and he also went in with me on the FL property mortgage. During his refinance, however, he added me to the deed on his house for estate planning purposes (His accountant advised us that would not disqualify me for the credit.) NOW my new accountant disputes that interpretation, saying my interest in partner’s property (only FOUR WEEKS before buying the FL property!) will disqualify me from the hombuyer credit on my condo in FL. In my view, I took an interest in my partner’s house as a vacation property since I had to move to FL but plan to spend time both places. Thoughts? Anyone have experience with a similar situation?

  37. My wife and I bought our house last september. Since we were first time home buyers, we got our $8000 credit. My job/company will be closing its doors at the end of summer. Do we have to pay back the 8000 credit?

  38. My husband and myself bought a mobile home on a rented lot in Idaho. We had a personal loan for a recreational vehical. The state recognizes this as personal property. We were told by our bank that this would not affect us and would still be considered First Time home buyers. They filed a 1098 which had no impact on our taxes. We were denied the first time home buyer tax credit. We appealed and were denied a second time. I am very frustrated and was wondering if there is anymore that we can do?

  39. My fiancee just purchased his first property this year and we have a camper on it and are living in it as our primary residence. Is he still eligable for the credit? Any feedback much appreciated! Thanks!!

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