First Time Home Buyers Tax Credit

A tax credit of up to $8,000 is now available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009. Unlike the tax credit enacted in 2008, the new credit does not have to be repaid.

Learn how you can take advantage of this $8,000 tax credit to buy a house. In its efforts to stimulate the economy and revive the housing market, Congress has enacted legislation providing a tax credit of up to $8,000 for first-time home buyers. The recently passed economic stimulus package, the American Recovery and Reinvestment Act of 2009, ushered in a host of deductions and credits that can save taxpayers thousands of dollars on their 2009 taxes.

As part of the American Recovery and Reinvestment Act of 2009, Congress authorized a first-time homebuyer tax credit of up to $8,000.  This break is actually a revised version of a tax credit that was passed in 2008. The 2008 credit was for $7,500 and it was really a no-interest loan. Taxpayers could get the money upfront, but they have to start paying it back in 2010 in 15 equal installments.

For those who qualify, the new credit is fully refundable, meaning that you get the $8,000 even if you didn't pay that much in tax, and doesn't have to be paid back if you keep the home for at least three years. It is, in effect, less of a tax break than it is a subsidy for buying. Better yet, even if you buy a house in 2009, you can take the credit on your 2008 tax return.

Calculating your eligibility is pretty simple, too.

See the snippet from IRS Form 5405 at the end of this article.  It's the worksheet portion of the First-Time Homebuyer Credit.  There are 10 fields of entry.  Just fill in the 10 fields and you've figured out your tax credit (or lack of tax credit, as the case may be).  What's nice about the 5405 form, though, is that on the IRS website, the form comes standard with 3 pages of instructions about how the First-Time Homebuyer Credit works and details about who is (and who is not) eligible.

The IRS definition of "first-time homebuyer" may be different from what you expect. 

According to the IRS, a first-time homebuyer is anyone who has not owned a "main home" in the last 3 years. It defines "main home" as a home in which a person has lived for most of the time. It can include traditional homes, houseboats, trailers and other residence types.

The IRS defines what it means to be a first-time homebuyer with respect to couples.  Based on its definition, there's no clean way for spouses or soon-to-be-married types to "cheat the system". Because both owners must be considered first-time homebuyers in order to claim the $8,000 credit, the IRS stymies tax filers that try to get crafty to take a tax credit when a tax credit may not be due.

Furthermore, the IRS instructions show that not every homebuyer will be eligible to claim an $8,000 credit.  Some notable, exclusionary cases include first-time homebuyers who:

And for some buyers, the available credit may not even reach the full $8,000 limit.

First of all, the value of the First-Time Homebuyer Tax Credit is limited to 10 percent of the home's purchase price.  A home purchase price of $75,000, therefore, caps the first-time homebuyer's tax credit at $7,500.

The second reason is because the amount of the First-Time Homebuyer Tax Credit starts to phase out as homebuyer income levels rise.

Tax credit phase-outs start at $75,000 for homebuyers filing separately and $150,000 on joint returns.

There are a few notable exceptions to the repayment rules, however.  For one, provided that you sell your home to a non-relative, the tax credit repayment is limited to the amount you gain on the sale.  A tax advisor can help you with the math on that.

Who qualifies for the Tax Credit?

It's pretty much easy. There are just 10 fields of entry.  Fill in the form and you'll know how large (or small) of a First-Time Homebuyer Tax Credit to which you're entitled.  To claim your credit:

If you do qualify for the credit, beware that if you sell your home, or cease to use it as your "main home" within 36 months, the IRS will require a full payback with only a few allowable exceptions.  Not moving in the next 3 years? Don't worry about it.

You should consult a tax adviser if you need further clarification.