By: Ronette King
April 4, 2010
As if the allure of spring weren't inspiration enough to make hopeful shoppers start searching in earnest, this year potential home buyers have the prospect of a nice tax credit to help with the purchase. You'll need to get to work fast, though, and acquire the house by the end of April if you want take advantage of what is often called the homebuyer tax credit.
The Louisiana Society of Certified Public Accountants helped taxpayers with their personal and corporate tax questions last month during its annual telephone Tax Hotline. During the three-hour public service event most of the questions posed to the 17 volunteer CPAs were related to claiming the New Homebuyer Credit. While the new act brought extra benefits to help the nation's economy recover, it also raised more questions about who qualifies and how to claim it.
There are some nuances that should be noted, and when it comes to income taxes, the details can never be examined too closely. If you're thinking of claiming the tax credit and are accustomed to preparing your own return, this could be the year to consult a tax professional.
The definition of "first-time home buyer" under the act means someone who hasn't owned a primary residence in the past three years. For them, the law gives a tax credit of $8,000 for single taxpayers with modified adjusted gross income of $125,000, and married couples with income up to $225,000.
Single taxpayers with income between $125,000 and $145,000 are eligible for a reduced tax credit. The credit phases out for married couples with annual income of $225,000 to $245,000. Anyone with income over those limits doesn't qualify for the home buyer tax credit.
To qualify for the tax credit, buyers must enter into a binding contract to buy a principal residence by April 10, and go to closing by June 30, 2010.
Finally, the act also tightened up on documentation needed to claim the tax credit. Taxpayers who want to claim the credit will have to prove they actually bought a house, not difficult considering all the paperwork involved in a home purchase. Taxpayers will also have to file a paper return and include Form 5405 and a copy of the settlement statement used to complete the purchase, the CPA Society said.
The Worker, Homeownership and Business Assistance Act was extended in November 2009 to include a longer list of home purchasers. The term now applies to people who have owned their present home for any five consecutive years in the past eight years, a group that in real estate terms is the "move-up" market.
A smaller credit -- up to $6,500 - is available to those longtime homeowners who purchase another home between November 7, 2009, and April 30, 2010. Up to $3,250 is available for married homeowners who file separately.
The cap on the purchase price of the home is $800,000.
For those homeowners who want to claim the tax credit for buying another home, the best way to prove their longtime ownership will be to submit either property tax records, homeowners insurance records or the Form 1098, the Mortgage Interest Statement from their lender for the property they owned during the five-year period claimed.
As with most things tax-related, be prepared to document, document, document. If the IRS suspects fraud, the act gives the agency authority to automatically assess taxes and start collection proceedings.
Members of the military have an additional year to buy a home and take advantage of the tax credit. They have until April 30, 2011, to enter a binding contract to buy, and until June 30, 2011, to close the deal.
This time of year is often a busy time in residential real estate as the school year winds down and schedules become a bit less rigid. Home buyers should line up financing and find a lender who will work with them, particularly now that lending standards have been tightened. Getting a home loan might require a larger down payment than in recent years as lenders scrutinize mortgage loans more carefully. Maintaining a strong credit history is essential now too, so request a copy of your credit report and be sure to clean up any errors. If you've done something good, like paying off a big credit card balance, make sure that is updated, a change that can strengthen your credit score.
Of course, the old benefits of owning your home remain. You'll also get to deduct the home mortgage interest on your federal income tax return and reduce your tax burden. The fact that your "rent" won't rise is a nice plus, although homeowner's insurance rates can vary somewhat from year to year. What you will have, though, is that abstract contentment and pride in being a homeowner.