Credit Sparks Homebuyers' Questions

Personal finance

Helping To Understand Who's Eligible, What New Rules Are In Place For Expanded Tax Benefit

November 10, 2009|By EILEEN AMBROSE

As soon as Congress passed legislation to expand the $8,000 first-time homebuyer credit, readers started sending in questions about whether they would qualify under the new rules.

The legislation, signed into law last week, gives people more time to purchase a house and allows even current homeowners to receive a credit of up to $6,500 if they buy a new principal residence to replace the old one. It raises the income limits so more buyers qualify.

The new law also addresses concerns about fraud after a recent report found that the Internal Revenue Service had paid out millions in homebuyer credits to thousands of ineligible people, including some 4-year-olds. You now must be a certain age to get the credit and prove you bought a house.

Here are some answers on the expanded credit:

Who is eligible for the $6,500 credit?

This is for certain homeowners buying a new primary residence. Retirees downsizing are likely beneficiaries, says Mark Luscombe, principal tax analyst with CCH, a provider of tax information. You must have lived in your house for at least five years in a row any time during the eight years before the purchase of the new house.

The credit is worth 10 percent of the purchase price, not to exceed $6,500. Spouses filing separate tax returns can claim up to $3,250 each.

What's the new deadline?

To get the $8,000 or $6,500 credit, you must contract to buy the house by April 30, 2010, and the sale must close by June 30, 2010.

What are the new income limits?

You will be eligible for the full credit if you're buying a house after Nov. 6 and your income is up to $125,000 for singles and $225,000 for married joint filers. The credit starts phasing out thereafter and disappears once income exceeds $145,000 for singles and $245,000 for joint filers.

Are there other restrictions?

You cannot claim the $8,000 or $6,500 credit if you buy a house for more than $800,000. You must be 18 years old, or at least your spouse must be 18 or older. You can't get the credit if you are claimed as a dependent by another taxpayer, says Mark Steber, chief tax officer of Jackson Hewitt Tax Service.

What documentation must I submit?

The IRS was criticized for handing out more than $139 million to filers who claimed the credit but hadn't bought a house yet. Now, you must attach a copy of the settlement statement with your tax return as proof of purchase.

How can I claim the credit?

If you buy a house this year, you can amend your 2008 tax return to claim the money early. Similarly, if you buy a house in 2010, you can claim the credit on your 2009 tax return, Luscombe says.

It now takes 12 weeks to 16 weeks to receive the money by amending a return. Steber suggests taxpayers might as well wait to claim the credit on their 2009 return than file an amended return.

What changes were made for members of the military?

Homebuyers must repay the credit if they sell the house within three years. But service members who sell their house because of a job transfer won't have to repay the money because of changes last week, says Jo Willetts, Jackson Hewitt's senior manager of tax resources.

Also, service members who are serving outside the United States will get an extra year to buy a house and claim the credit, Luscombe said.

If I was ineligible for a full or partial credit because of my income before, could I now claim the credit because of the higher limits?

The new income limits apply only to purchases after Nov. 6. Earlier purchases fall under the old rules, where the credit starts to phase out once income reaches $75,000 for singles and $150,000 for married joint filers.

I purchased a house in early 2005 that my wife and I are now selling. Can I obtain the new $6,500 credit? I'm close to the five-year mark but will be a couple of months off.

Steber says "The code is clear about the five-year timing. Unless you can put off the closing for another four months, you will not currently qualify for the credit."

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