First-Time Homebuyer or Long-Time Homeowner: You May Qualify for a Tax Credit

Real Estate

If you did not previously qualify for the homebuyer tax credit, you may under new legislation. The Worker, Homeownership and Business Assistance Act of 2009 (the “New Act”), signed into law on November 6, 2009, extends and expands the American Recovery and Reinvestment Act of 2009 (the “Old Act”), which was set to expire December 1st. In addition to extending the deadline, the New Act raises the income limitations for homebuyers claiming the credit. It also authorizes a credit for long-time homeowners buying a replacement principal residence.

First-Time Homebuyer
The New Act retains the definition of a first-time homebuyer as an individual (and if married, such individual’s spouse) who has had no ownership interest in a principal residence for the three-year period leading up to the date of a new purchase. This means you do not have to be a literal first-time homebuyer to qualify. The maximum tax credit amount remains $8,000 ($4,000 if married filing separately).

The Old Act began to phase out at income levels of $75,000 for individuals and $150,000 for married couples. The New Act raises the income limits for homes purchased after November 6, 2009. Individuals with incomes up to $125,000 and married couples with incomes up to $225,000 may receive the maximum tax credit. The credit decreases, however, for single buyers who earn between $125,000 and $145,000 and between $225,000 and $245,000 for married joint filers.

Long-Time Homeowner
The New Act adds a credit for current homeowners purchasing a home between November 7, 2009 and April 30, 2010, who have used the home being sold as a principal residence for five consecutive years within the last eight. The income limits are the same as those for first-time homebuyers: $125,000 for a single buyer and $225,000 for a married couple, phasing out over the next $20,000 of income above these levels. For a qualifying current homeowner, however, the maximum tax credit is limited to $6,500 ($3,250 if married filing separately). Except for receiving a lower maximum tax credit, a qualifying current homeowner is otherwise treated as a first-time homebuyer for the purposes of the New Act.

Additional Limitations
In order to qualify for the credit, a first-time homebuyer or long-time homeowner must be buying or selling a principal residence. The term “principal residence” has the same meaning as used in Section 121 of the Internal Revenue Code. Although not clearly defined in this section, IRS Publication 523 further clarifies that a primary residence is “the home where you ordinarily live most of the time.” A principal residence can be a house, houseboat, house trailer, cooperative apartment, or condominium.

Under the New Act, no credit will be given to a first-time homebuyer or qualifying homeowner if the purchase price of the principal residence exceeds $800,000. The Old Act contained no such limitation on the price of the purchased home.

The New Act applies to all principal residence purchases made after November 6, 2009. In order to qualify for the credit, a qualifying homebuyer must buy, or enter into a contract to buy, a principal residence on or before April 30, 2010. If a qualifying homebuyer has entered into a binding contract on or before April 30, 2010, and closes before July 1, 2010, the qualifying homebuyer will remain eligible for the tax credit.

The New Act provides an extension of the tax credit until April 30, 2010 and significantly increases the income threshold to $125,000 for single buyers and $225,000 for married couples. Qualifying current homeowners are also eligible for a $6,500 tax credit, if they have lived in their home for at least five consecutive years out of the last eight and buy a replacement principal residence. So under the New Act, both the first-time homebuyer and the long-time homeowner may be eligible for a tax credit.

Since this article is intended to provide general information regarding a complex piece of legislation, please consult with an attorney or tax advisor for more information. The attorneys at MacElree Harvey can assist you with any concerns or inquiries you may have regarding the new homebuyer tax credit legislation or with purchasing a new home. Please do not hesitate to contact us.

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