To offer incentive for homebuyers who purchased or plan to purchase their first home in this adverse economic climate, Congress included up to a $7,500 tax credit as part of the Housing and Economic Recovery Act of 2008.
It’s important to understand the requirements, qualifications, and filing instructions to determine whether or not one can take advantage of this credit.
The Tax Credit is Actually an Interest-Free Loan
One of the greatest misconceptions about the First-Time Homebuyers Credit is that, as it currently stands, it must be paid back over a period of 15 years. While the U.S. Congress is, as of January 2009, deliberating removing the requirement to pay back the credit as part of a new economic stimulus bill, it is important to know that unless new legislation is passed, this money must be paid back in-full over 15 years.
The Tax Credit is not Always $7,500
$7,500 is the maximum allowable credit that can be given to a first-time homebuyer. To qualify for the credit in this amount:
- The purchased home must be the buyer’s primary residence; vacation homes and rental properties do not qualify.
- The buyer must not have owned a home in the three years prior to the purchase date of this home. This means that a person who has at some point previously owned a home, but has not owned a home in the three years prior to the purchase date of the qualifying home, can also file a credit.
- The buyer’s modified adjusted gross income, or MAGI, must not exceed $150,000 for married couples filing jointly, or $75,000 for buyers filing as single. This means that any married couple with a MAGI of less than $150,000 or an individual with a MAGI of less than $7,500 can qualify for the full $7,500 credit.
According to the IRS, partial credits are granted to individuals whose incomes fall into the “phase-out” category: “For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.”
Who Does Not Qualify?
- Married couples whose MAGI exceeds $170,000 or individual taxpayers whose MAGI exceeds $95,000
- Homebuyers who purchased the home from a close family member (parent, sibling, grandparent, etc.)
- Homebuyers eligible to claim the Washington, D.C., first-time buyers credit
- Homebuyers who sold their home before the end of the year
- First-time homebuyers who purchased their home before April 8, 2008, or after July 1, 2009.
How to Claim the Credit
To claim the credit, IRS Form 5405 must be filled out and submitted when taxes are filed. Many online tax filing services, such as TaxSlayer, include the form with their online filing process.
The information in this article is subject to change as Congress evaluates whether to extend the credit or remove the requirement that it be paid back. Keeping tabs on the economic stimulus bill before the Senate at present time is the best way to stay current on any changes to this credit.