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Date posted: November 17, 2009

Expanded Homebuyer Credit

President Obama signed into law on November 6th the Worker, Homeownership, and Business Assistance Act of 2009. The act extends unemployment benefits by 20 weeks in states hardest hit by the down economy and by 14 weeks all other states. The law also liberalizes and makes other changes to the homebuyer credit is several important ways.

Current credit

Prior to the new law, only first-time homebuyers were eligible to claim a refundable tax credit for buying a home. The credit is 10% of the cost of the home, up to a maximum of $8,000 ($4,000 for married persons filing separately).

Extension

The credit was set to expire on November 30th, but the new law extends it through April 30, 2010. If you are in contract on that date, you can claim the credit if the sale closes by June 30, 2010.

Those serving in the military outside the U.S. for at least 90 days have an extra year in which to claim the credit. They can essentially close on a home through June 30, 2011.

Income limit

Only taxpayers with modified adjusted gross income (MAGI) under set limits can claim the credit. The MAGI range for eligible purchasers has been expanded to cover more buyers.

  • For homes purchased after November 6, 2009, the full credit applies to singles with modified adjusted gross income (MAGI) of $125,000 and for joint filers with MAGI up to $225,000. The phaseout ranges run to $145,000 for singles and $245,000 for joint filers.
  • For homes purchased prior to November 7, 2009, the full credit applies to singles with MAGI up to $75,000 and for joint filers with MAGI up to $125,000. The phaseout ranges run to $95,000 for singles and $145,000 for joint filers.

Cap on home price

Until now there had been no limit on the purchase price of the home. Now, the credit can only be claimed with respect to a home costing no more than $800,000. There is no partial credit, so if the home costs $800,001, no credit is allowed.

Long-time residents

The credit is no longer restricted to "first-timers." This means empty nesters who want to downsize and those who relocate for jobs or any other reason may be able to qualify for a tax break when buying a new home. Starting after November 6, 2009, a modified credit can be claimed by those who have owned a home for a set period, sell it, and buy new home within the time limit above.

The modified credit is 10% of the purchase price, up to a top credit of $6,500 ($3,250 for married persons filing separate returns).

A long-time resident is defined as someone who has maintained the same principal residence for at least five consecutive years during an eight-year period ending on the date of the purchase of the new home.

Official duty homebuyers

Military personnel, members of the Foreign Service, and employees of the intelligence community who bought homes before 2009 are now relieved of any recapture. Usually, for homes purchased before 2009, there is a 15-year recapture period. However, if the home is disposed of because of extended duty service, the recapture rule does not apply. Extended duty service for this purpose means a call or order to duty for a period of more than 90 days or for an indefinite period.

Personal limitations

There are additional restrictions on qualifying for the credit, including:

  • Age and dependency. The purchaser must be at least 18 years old. If the purchaser's spouse is at least 18 years old, then the couple can qualify for the credit. The purchaser cannot be claimed as a dependent on another taxpayer's return.

  • Related parties. The credit cannot be claimed for a home acquired by a person related to the buyer or the spouse of the buyer, if married. This applies for purchases after November 6, 2009.

  • DC homebuyers. The special first-time homebuyer credit for residents of the District of Columbia cannot be claimed if the homebuyer also qualifies for the national credit; only the national credit can be taken.

Anti-fraud

To combat fraud with respect to this credit, the new law includes some new rules:

  • Substantiation. A properly executed copy of the settlement statement used to complete the purchase must now be attached to the return.

  • IRS assessment. The IRS may assess an additional tax without the issuance of a notice of deficiency for a credit containing a mathematical or clerical error. This authority applies retroactive to tax years ending on or after April 9, 2008 (i.e., for any homebuyer credit that was or will be claimed).