Frequently Asked Questions about the Home Buyer Tax Credit

The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

The following questions and answers provide basic information about the tax credit. If you have more specific questions, I strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1. Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

2. What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

3. How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

4. Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

5. What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous “credit” was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

9. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.

10. What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

11. I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

12. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

13. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

14. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

15. I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.

16. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.

17. Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

18. I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.

19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.

Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

20. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose (”elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.

21. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

Larry Stone, Santa Clara County Assessor to review values of a record number of  homes. This year you’ll get your home’s assessed value postcard at the end of June instead of May. The assessor’s team is busy checking almost 50% of the homes (about 200,000 homes) in the county. Many home owners who bought homes after 2000 will see a lower tax bill this year.

If you think your property’s value is less than the assessor’s number you can appeal directly to the assessor’s office, filing a special form on July 2nd. You have to act fast, not to miss the dead line.

APPLICATION FOR CHANGED ASSESSMENT
September 15 is the last day to file an assessment appeal application for reduced assessment with the Clerk of the Board of Supervisors.

“If it isn’t the Great Depression, it’s the Great Recession,” said County Assessor Larry Stone.

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Living in one of the best, most stable communities helped us maintain high home prices which appreciated immensely during the last 30 years. We did have some dips during that time but generally our homes appreciated about 5 times over, (milk, bread, fruit and vegetables hardly doubled in price). Very few homes get sold here. People prefer to stay put.
The easy access to shops, I-280 and I-85, the proximity to Cupertino, Los Altos or Palo Alto schools makes it ideal neighborhoods to live in. South Sunnyvale, Cupertino, Los Altos, Palo Alto and the good parts of Mountain View maintained high prices. A 3-bedroom ranch-style house in the South Sunnyvale, priced at $950K was reduced in price after a week to $908K and attracted 4 offers to raise the price to above $910k. Generally, in these desired areas the prices are about 20% lower than the peak time on March 2008. Back then, a 3 bedroom ranch style home was priced at $975K and after reviewing 11 offers sold for $1.109M. Invested funds lost many times more than 20%.
The banks’ new guidelines are very strict - they demand higher down payments and better credit. The new limit for Conforming loan starting January 2009 is $625,500. Buyers will have to pay a higher down payment or get a second loan. The underwriters who decide if you can get a loan and on what terms, expect a fully documented file. Stated income (in which you would state that you earn a certain amount without proving it) is gone. Many foreign families from overseas go back home to their native land. Most of them lived in rental homes so it didn’t affect the prices much. The banks are getting more organized and more in control of the situation but a new wave of layoffs is arriving and we all hope that the employment market stabilizes.

QUICK UPDATE:

The units sold in October 2008 v. October 2007 were up 57%. Most of that activity happened in homes under $500k, short sales and REO (Real Estate Owned by the bank after foreclosure or how you would want to call it “Real estate Opportunity”) In addition, the 1 million plus range seems to be moving better than the deep-freeze we were in from October 10 to the end of October. During the last 5 weeks buyers are buying 1 million dollar plus homes at a faster rate than in September - October. It’s a great opportunity to upgrade from smaller homes which lost relatively less to larger, more expensive home.

WHAT IT TAKES TO SELL IN THIS MARKET:

Price and condition of the home become even more critical than in the past. Homes that are still selling are either priced more aggressively or upgraded and in good Condition. The homes that are priced well and remodeled are attracting the most attention and getting sold faster.

Of course location is of utmost importance. Being in a good school area improves the saleability of the house immensely.

WHO IS BUYING TODAY?

Relocation Folks; First Time Homebuyers; Investors in anticipation for appreciation for under 400K market; Move-up Buyers making a lateral move; Folks that have been sitting on the sidelines for a few years; Folks at all price points that have been pushed out of the market by multiple offers over the last 4-5 years

Investors:

If you are planning to buy a short sale, check with your real estate lawyer. There are too many law suits going around due to innocent mistakes or not knowing the laws and regulations.

QUICK RATE UPDATE: please note, the actual rate that you can get depends on your credit history and down payment amount.

30 Year Conventional 6.000% @ 0 pts up to $417,000

30 Yr Agency Jumbo 6.375% @ 0 pts up to $729,750

5/1 ARM Super Jumbo 6.125% @ 0 pts up to $4M

The world economy is shaky; the Dow Jones Index lost 504 points in one day, and looking at the candidates to lead the most important country in the world is not encouraging. The papers predict a grim economic future; prices are dropping in most of the U.S. People are having a hard time getting loans and banks continue to ask for more proof of work verification and available funds to close the deal. It all sounds so depressing, so how come housing prices in our area are still holding strong? I still see multiple offers. So many people check the open homes during the weekend and show real interest. Two weeks ago a 3br 1525 s.f. house was sold in Sunnyvale, in the Santa Clara school district; just on the East side of Wolfe. It was sold for $82k over asking price. It was not significantly improved (an Ikea kitchen with Formicas counter tops and bathrooms with vinyl floors) but the sellers removed some walls and the yard was very pretty and spacious. A 3 br town house in Sunnyvale, just north of Fremont Ave near Mary Ave was sold with 4 offers over asking price and a similar one was sold for a higher price with 2 offers.
The prices in the Cupertino school district area have not increased since the crazier period in February-March this year when people offered 10-15% more than asking price. Now they either negotiate around asking price, or if there is competition (Yes, it still happens) they add 1-3%. If you compare today’s sold prices to what was sold in March 2008 the prices have decreased.
As of today there are 75 homes for sale in Palo Alto - the most expensive priced at $29,850,000, which has been on the market for 381 days. The cheapest house in Palo Alto is priced at $799,950.
Los Altos and Los Altos hills have 114 homes for sale in. The longest listing time on the market at that area is 405 days.
Mountain View has 63 homes for sale in - the most expensive is $4.4M for a small house on a huge lot (40,386 s.f.). The longest listing time in MV is 97 days.
Sunnyvale has122 homes for sale in, with one home at 216 days on the market. There are only 14 homes for sale in Sunnyvale in Cupertino school district.
Cupertino has 106 homes for sale with one home on the market for 390 days (the sellers surprisingly raised the asking price). Out of these homes 84 homes belong to the Cupertino school District.
Saratoga has 128 homes for sale, the most expensive priced at $12M. One home has been on the market for 763 days, asking $6.6M.
The inventory is growing very slowly these days, as it does every autumn. September is the beginning of fall and most sellers prefer to sell in the spring. However, people still have to move or need to sell.
This graph represents the whole Santa Clara County. It shows how the inventory slows down and more homes get into contracts. Many foreclosures, short sales and REO are selling faster. Investors and home owners use the opportunity to own homes with relatively low prices. Please feel free to ask me if you are not familiar with any of the terms I used. I am always happy to hear from you.