Real Estate News

First Time Homebuyers Tax Credit — Some Practical Questions

How do I apply for the credit?

There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their 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

Can I use the credit amount as 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 a way to get any cash flow benefits before I file my tax return?

Yes, there is. Any first-time home buyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

Some “Real World” Examples

What if I purchase later this year but can’t get to the settlement before December 1?

The credit is available for purchases before December 1, 2009, A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus closings must occur before December 1, 2009 for purchased to be eligible for the credit.

I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just $7500 credit?

No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.

If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?

No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.

I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?

One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions may apply, check with your accountant. Note that this same 3 year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.

What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?

The repayment rules are eased for many circumstances. If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster ) within the first three years.

For information on using your credits this year contact Diane Teti, Realtor diane@dianeteti.com

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