A Big Applause for First Time Homebuyers, and Up to $8,000 in Tax Credits
Your first home gets a well deserved place in your personal hall of fame, right next to your first love. Owning that little spot makes you feel like nothing else in the whole world. However, an additional plus-side is on the way. It is called the First time Homebuyer Credit and it comes courtesy of the IRS.
Who’s On and Who’s Off?
If you bought your home during the period that starts on January 1, 2009 and ends on April 30, 2016, and did not own another main home in the 3 years prior to the transaction (and neither did your spouse, if you’re married and file jointly), you may claim the First Time Homebuyer Credit. New law amendments extended the allowed period to September 30, 2016, if the binding sales contract was in force before April 30, 2016. If you are a member of the armed forces, the period can be even further extended. You can read more about this in our special military tax guide.
If you purchased your home in 2008, you can still claim this credit. If you already filed your 2008 return, you can use Form 1040X to amend your 2008 tax return, and include Form 5405. However, for purchases made in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual payments beginning with the 2016 tax year.
If you are claimed as dependent on somebody else’s return, or if you are under 18 years of age, you cannot claim this credit. Also, if you paid more than $800,000 for the house in question, you don’t qualify for the First Time Homebuyer Credit. Other conditions to be able to claim the credit are that your home is in the United States and you are not a resident alien. Extra requirements may apply so we advise you to take a look at the Instructions for Form 5405 if you think your case might be a lot different from the average.
So how much money are you entitled to? The First Time Homebuyer Credit gives you back 10% of the purchase price, but not more than $8,000 ($4,000 if married filing separately).
There are some income limitations attached. If your modified adjusted gross income (MAGI) is not higher than $125,000 ($225,000 if you are married and file jointly), you are allowed to take the full credit. A phase-out bracket applies for MAGI between $125,000 ($145,000 if married filing jointly) and $145,000 ($245,000 if married filing jointly). After these limits, you cannot claim the credit at all.
These MAGI limits are valid only for purchases that took place after November 6, 2009. For purchases that occurred between January 1, 2009 and November 6, 2009, the MAGI limits are $75,000 for single filers and $150,000 for married couples filing jointly.
How can the credit be claimed? You have to file Form 5405 and attach any necessary documentation regarding the home. That includes a copy of your settlement statement showing all parties’ names and signatures, the address of the home, the selling price and the date of the transaction. In general, this settlement statement is your Form HUD-1, Settlement Statement. If you’re claiming the credit for a newly built home and don’t have an executed settlement statement, you should attach a copy of your certificate of occupancy that has your name, home address and date on it.
Oh, No! Repay the credit?
In some cases you may be asked to pay back the credit, for example, if you lose ownership of the home during a 3-year period after the year in which you claimed the credit. This includes selling the home (even if subject to foreclosure), converting the home for business use (for an activity that you do to make a profit) or rental use. Also, if the house is destroyed, condemned or disposed of under threat of condemnation in the first 3 years after purchase, you will have to repay the credit.
If you sold the home to someone who is not your relative, you only have to repay the amount of the credit that exceeds the amount of gain on the sale. You can determine the gain on the sale using the Form 5405 Gain (or Loss) Worksheet on page 5.
You repay the credit by including it as additional tax on the return for the year when the home ceases to be yours (you can delay it by 2 years if the home was destroyed, condemned or disposed of under threat of condemnation and if you didn’t purchase a new home in the meantime).
Once you decide to take this credit, you should know that currently the IRS is experiencing increasing processing times, as it is trying to tackle fraud related to First Time Homebuyer Credit claims, according to a NY Daily News report. So it is better if you don’t spend your own money just because you’re expecting a check from the IRS. Wait to cash it first, as it can take many months from the moment you file your taxes until the actual arrival of the money.