In order to stimulate the lagging economy by encouraging home sales, the United States government has passed the Worker, Homeownership and Business Assistance Act of 2009.
In addition to extending the first-time homeowner tax credit, this bill adds a credit for existing homeowners who want to buy a new residence. There are a number of restrictions in the bill, so not everyone will qualify for the credit, but those homeowners who do not qualify may still find they have more potential buyers for their current homes. .
Extension of the Home Buyer Credit
Homebuyers have until April 30, 2009 in order to sign a contract for a new home, and the home must close by July 1, 2010. The amount of the credit for existing homeowners is $6.500, ($3,250 for married taxpayers filing separately.)
In order to prevent investors and “flippers” from obtaining the credit, buyers need to have lived in the same residence for five years. However, those who recently bought homes and wish to sell may still qualify, because the requirement is that the owner live in the home any five years out of the last eight years before the qualifying home is purchased.
A possible qualifying scenario is that a homeowner could have lived in a residence from 2002 to 2007, moved in 2007, and wish to buy a new home in 2010. Under the guidelines on the IRS website, this situation would still qualify for the credit.
It is important to note that this is a tax credit, which directly reduces the amount of tax, as opposed to a deduction, which reduces income on which a percentage of tax is assessed.
Income and Other Qualifications for the Tax Credit
Not all taxpayers will qualify for the credit. The IRS specifies “the credit phases out for individual taxpayers with modified adjusted gross income (MAGI) between $125,000 and $145,000 or between $225,000 and $245,000 for joint filers.”
Purchasers need to be at least 18 years old, and cannot be a dependent on anyone else’s return. The purchase price of the home must be less than $800,000. .
Pros and Cons of Using the Tax Credit
Despite the helpful financial impact of the tax credit, many homeowners may not be able to take advantage of the situation. The difficult economy has caused many properties to fall in value, and move-up buyers will still need to sell their current homes at an acceptable price in order to have a down payment and to afford mortgage payments.
Incurring closing costs on both sale of a current home and the new residence will likely exceed the credit. Taxpayers will want to closely review the benefits of moving during this difficult time.