Tax Tips: Straight Talk About The 2009 Homebuyer Tax Credit

A Tax Tip Article from The Tax Institute at H&R Block

There’s great news for first-time homebuyers in 2009!

For eligible first-time homebuyers who purchase a home on or after Jan. 1, 2009 and before May 1, 2010, the first-time homebuyer tax credit is now $8,000 and unlike eligible first-time homebuyers in 2008, the qualified 2009 or 2010 first-time homebuyer no longer has to repay the credit unless the homeowner sells or moves out of the home within 3 years of purchase. This is BIG!

The tax credit is 10 percent of the purchase price of the home with a maximum credit of $8,000 (or $4,000 if married filing separately). For purchases prior to Nov. 7, 2009, the $8,000 credit begins to phase out for individuals with MAGI (modified adjusted gross income) over $75,000 and at $150,000 for married couples filing jointly. It is fully phased out for individuals with MAGI of $95,000 and at $170,000 for joint filers, half that amount for married persons filing separate returns.

For purchases after Nov. 6, 2009, the credit begins to phase out for individuals with MAGI over $125,000 and at $225,000 for married couples filing jointly. The credit is fully phased out for individuals with MAGI of $145,000 and at $245,000 for joint filers. Additionally, for purchases after Nov. 6, 2009, the credit can only be claimed if the purchase price does not exceed $800,000.

Long-time homeowners who purchase a replacement home after Nov. 6, 2009 and before May 1, 2010 can qualify for up to a $6,500 ($3,250 for couples filing separately) refundable credit. As with the $8,000 credit, the credit must only be repaid if you sell it or stop using it as your principal residence within 3 years of purchase.

Qualifications
In addition to income requirements for eligibility for the $8,000 homebuyer credit, there are some other things you should know to qualify for the credit:

• You (and your spouse, if married) cannot have owned a home in the three years prior to the purchase
• You cannot purchase your new home from a close relative including a parent, grandparent, child or grandchild, though the purchase of a home from a sibling (brother or sister) does not disqualify you from claiming the credit; purchases from step-relatives are allowed for the credit as well
• For purchases after November 6, 2009, you may not purchase the home from a close relative of your spouse (your spouse's parent, grandparent, child, etc.); you also may not claim the credit if you are or can be claimed as a dependent on another taxpayer's return.
• You also cannot claim the credit for a home purchased from a related taxpayer such as a corporation or partnership in which you and/or your relatives (or your spouse and his or her relatives) own more than a 50% interest.
• You must purchase the home on or after Jan. 1, 2009, and before May 1, 2010; for a home under construction, you must occupy the home before May 1, 2010. Note: A special rule allows you to qualify for the credit if you have entered into a binding purchase contract before May 1, 2010, and you close on the home before July 1, 2010.
• The home must be used as your principal residence; rental property and vacation homes do not qualify for the credit
  You are not eligible for the credit if you are a nonresident alien; for married couples filing jointly, at least one of you must be a U.S. citizen or resident to qualify for the credit
• The credit does not apply to homes located outside the U.S.
• If you owned a principal residence outside of the U.S. within the last 3 years, and meet the other requirements, you are eligible to claim the first-time homebuyer credit for a home purchase in the U.S.
  
  The eligibility rules for the $6,500 credit are similar to the rules for the $8,000 credit, except that you must have:

• Owned and lived in the same principal residence for at least 5 consecutive years out of the last 8 years prior to purchasing the replacement home
• Purchased the replacement home after Nov. 6, 2009, and before May 1, 2010 (or have a binding purchase contract in effect prior to May 1, 2010 and close on the home before July 1, 2010).
• Special rules may apply if you or your spouse is on extended active duty service outside the U.S.

Receiving the tax credit
If you purchased a home in 2009, you should be aware that a late-year tax law change generally requires that substantiation of the purchase must be submitted with your return.  For most home purchases, substantiation will be a properly executed closing statement, such as a HUD-1 statement.

The IRS modified Form 5405, the Homebuyer Tax Credit form to accommodate the substantiation requirement.  The revised Form 5405 must be filed, along with appropriate substantiation, if you are claiming the credit on your 2009 tax return. For homes purchased after November 6, 2009, the revised form and purchase substantiation are required whether the credit is claimed on the 2008 or 2009 return.

Note: If you purchased the home before November 7, 2009, and wish to claim the credit on an amended 2008 return, you may do so and use the unrevised Form 5405 without sending substantiation to the IRS. 

The IRS was not able to implement electronic submission of the closing statement before the upcoming filing season. As a result, any 2009 return that includes Form 5405 cannot be filed electronically. You have the option of electronically filing your 2009 return without the homebuyer credit and then filing an amended return to claim the credit. 

Note: Individuals who must file Form 5405 to repay the credit or report an exception to the repayment rules, also cannot electronically file Form 5405.

When in doubt …
As with any financial decision that has tax implications, the best advice is to always talk with your tax professional to determine a course of action that may be best for your individual financial situation.

This Tax Tip is brought to you by The Tax Institute at H&R Block. The Tax Institute at H&R Block is the go-to source for objective insights on federal and state tax laws affecting the individual.  It provides nonpartisan information and analysis on the real world implications of tax policies and proposals to policymakers, journalists, experts and tax preparers.  The Institute’s experts include CPAs, Enrolled Agents, attorneys and former IRS agents who draw from years of experience and H&R Block’s extensive network of resources. 

This Tax Tip is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties. As always, everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.