Common Questions About The First Time Home Buyer Tax Credit

Are You A “First-Time Homebuyer”?

You are a First-Time Homebuyer if you, and any or all other purchasers of your home, did not own another main home at any time during the three years prior to the date of purchase.

For example, if you bought a home on January 15, 2009, you cannot take the 2009 tax credit for that home if you owned, or had an ownership interest in, another home at any time from January 15, 2006 through January 15, 2009.

If married filing jointly, both must meet the First-Time Homebuyer test to take the credit on a joint return. So 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 buyer tax credit.

However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first time buyer, something that may occur if a parent jointly purchases a home with a son or daughter.

If you own or owned a vacation home and/or rental properties you are still eligible for the tax credit as long as you did not own a personal residence the last three years prior to the purchase of your main home. If the last time you owned a primary residence was 2005, you are eligible for the credit even though it is not actually your “first” home.

 
What is the definition of “principal residence?”

Generally, a principal residence is the main home where you spend most (usually defined as more than 50%) of your time. It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos, townhomes, co-op apartments or housetrailers. Even some houseboats or manufactured homes count as principal residences. The home must be located in the United States. For new construction, the “purchase date” is the date you occupy the home. So the move in date must be before December 1, 2009 to qualify for the $8,000 tax credit.

How does a tax credit work?

Every dollar of a tax credit reduces your income taxes by a dollar. Credits are claimed on your income tax return. Thus, you would figure out your total tax due, then subtract the tax credit from your total. So, if before taking any credits on a tax return you had a total liability of $9,000, a $8,000 credit would wipe out all but $1,000 of the tax due ($9,000-$8,000 = $1,000).

What is a “refundable” tax credit?

Let's say you’re eligible for a $8,000 credit but your entire income tax liability for the year is less than that amount, the remaining balance is refundable. So if your total tax liability was $6,000, the IRS would send you a check for $2,000. The refundable amount is the difference between the $8,000 credit amount and the amount of tax liability ($8,000-$6000=$2,000).

What is the difference between a “tax credit” and a “tax deduction”?

A tax credit is a dollar-for-dollar reduction in what you owe. That means if you owe $8,000 in income taxes and you get a $8,000 tax credit, you would owe nothing to the IRS.

On the other hand, a tax deduction is subtracted from the amount of income that is taxed. So a tax deduction is a reduction against earned income. For the purposes of illustration, let's assume you are in the 15 percent tax bracket and owe $8,000 in income taxes. If you receive a $8,000 deduction, your liability would be reduced by $1,200 (15 percent of $8,000). In other words, your tax liability would be lowered from $8,000 to $6,800.

How do I apply for the credit?

There is no pre-purchase authorization, application or similar approval process. If eligible, you simply claim the credit on your IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

Generally speaking, who doesn’t qualify?

You are not eligible for the tax credit if: you do not meet the income requirements; you buy your home from a close relative (spouse, parent, grandparent, child or grandchild); you acquired your home by gift or inheritance; or, you stop using your home as a main home or sell your home before the end of three years. A vacation home, or a rental property or a main home purchased outside of the U.S. are not qualified home purchases.

Can the credit amount be part of my down payment?

No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

Is there any way to get the “cash flow” benefits of the tax credit before I file my tax return?

Yes. If you believe you are eligible for all or part of the credit, you can modify your income tax withholding (through your employers) or adjust your quarterly estimated tax payments. If you’re subject to income tax withholding, you would get an IRS Form W-4 from your employer, follow the instructions on the schedules provided, and give the completed Form W-4 back to your employer. In your case, your withholding might decrease and your take-home pay could increase. If you make estimated tax payments, you would make similar adjustments.

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