Time is Running Out for the Homebuyer Tax Credit

If you (or your spouse) are at least 18 years of age and plan on taking advantage of the liberalized homebuyer tax credit, time is running out. Unless extended by Congress, this refundable tax credit will no longer be available for homes purchased after April 30, 2010 or after June 30, 2010 when a binding contract to purchase was entered into prior to May 1.

The homebuyer credit is 10% of the purchase price but not exceeding $8,000 for first-time homebuyers and $6,500 for long-time residents. This refundable credit is yours to keep, even if you are subject to the alternative minimum tax, as long as the home continues to be used as your principal residence for 36 months after purchase.

A qualifying home can include a conventional single-family structure, house trailer, mobile home, houseboat, cooperative apartment, condominium, duplex, or row house as long as it can qualify as the buyer’s principal residence but not exceed $800,000 in cost.

You also have the option to claim the credit on your 2009 tax return, thus putting the money into your hands more quickly. When making the decision to claim the credit in 2009 or 2010, the homebuyer will need to consider in which year the credit will provide the best benefit. This is because the credit phases out for higher-income taxpayers based upon the taxpayer’s AGI. So, if you qualify for the credit and your income is in the credit phase-out range, you probably will want to claim the credit in the year with the lower income. The credit is ratably phased-out for individual taxpayers between $125,000 to $145,000 ($225,000 and $245,000 for married taxpayers filing jointly).

A taxpayer is considered a first-time homebuyer if he or she had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. A long-time resident is any individual who has owned the same principal residence for any 5 consecutive years during the 8-year period ending on the date of purchase of a subsequent principal residence. Caution: If either spouse fails the first-time homebuyer or long-time resident definition, neither gets the credit (even if filing separately).

To prevent fraudulent claims of this credit, the IRS is requiring additional documentation to be attached to the return, including a copy of the final settlement statement (generally Form HUD-1) from the purchase or the certificate of occupancy for a newly-built home. In addition, long-time residents must attach documentation such as mortgage interest statements, property tax records, or homeowner’s insurance records for the 5-out-of-8-years consecutive period being used to claim the credit.

In addition to the credit, the tax law also allows first-time homebuyers to make a penalty-free withdrawal of up to $10,000 from their IRAs for the purchase of a home. Married individuals each can withdraw up to $10,000 from separate IRA accounts for this purpose. Although the withdrawal is penalty-free, it is still taxable, so you should consider carefully the tax ramifications and the impact on your future retirement before invading your IRA accounts.

It would probably be appropriate to consult with this office in advance of a home purchase if you or family members are contemplating utilizing the new credit or withdrawing from an IRA.

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