Read the details and discover ways to use the credit for profitable real estate deals, including creative seller financing and short sales.
AT A GLANCE
Hoping to stimulate both the ailing economy and real estate market, Congress passed legislation that was signed into Law by President Obama on November 6, 2009. First the highlights making headline news:
Extended: The current $8,000 tax credit available to first time home buyers was extended to April 30, 2010. There are also increased income limits, a cap on the home price, fraud protection, and provisions for delayed closing dates.
Expanded: A tax credit of up to $6,500 is now available to existing homeowners that want to move-up or purchase a different principal residence between November 7, 2009 and April 30, 2010.
OUT WITH THE OLD
If you are having troubles keeping up with the Home Buyer Tax Credit changes, don’t feel alone. First there was the quasi credit that had to be repaid for certain purchases in 2008 followed by the $8,000 tax credit contained in the Recovery Act in early 2009.
This last tax credit was set to expire on November 30, 2009 so the pressure was on lawmakers to provide for an extension. (For details on the prior tax credit that applied to first-time home buyer purchases from January 1, 2009 through November 6, 2009 read our article entitled Using Owner Financing with the $8,000 First Time Home Buyers Credit.)
IN WITH THE NEW
The official name of the new law is HR 3548 – The Worker, Homeownership, and Business Assistance Act of 2009. It provides for extended unemployment benefits for the jobless and tax breaks for struggling businesses, while also extending the temporary home buyer tax credit. Now for the details:
Revised Home Buyer Tax Credit Enacted November 2009
- First Time Buyer Credit: $8,000 (up to 10% of home price)
- First Time Buyer Eligibility: Did not own principal residence for prior 3 years
- Move-up/Repeat Owner Credit: $6500 (up to 10% of home price)
- Move-up/Repeat Eligibility: Must have used home sold or being sold as principal residence consecutively for 5 of the previous 8 years
- Start Date: November 7, 2009
- Expiration Date: Closings on or before April 30, 2009
- Exception Date: Purchaser has until July 1, 2010, to close if a binding contract is in effect on April 30, 2010
- Home Types: Primary residence including single-family home, condos, town homes, co-ops, mobile homes, and houseboats.
- Home Price Limit: $800,000 Sales Price or less
- Income Limits: $125,000 single and $225,000 married (Based on MAGI with phase-out provisions for an additional $20,000)
- Credit Type: Tax credit not a deduction so refund is received in excess of tax liability
- Repayment: No repayment required if buyer lives in house for 3 or more years
- Fraud Protection: HUD-1 Settlement Statement or other documentation to be attached to tax return IRS Form 5405
- Dependent Provision: Must be 18 years or over and NOT claimed as a dependent by another taxpayer
- Relatives: Purchase can’t be from a family member (parents, children, spouse, etc)
Source: NAR Issue Brief and Federal Housing Tax Credit FAQ
Real estate agents, builders, mobile home dealers, and real estate investors have been using the tax credit to appeal to first time home buyers for the past year. They now have the opportunity to entice current homeowners interested in replacing their existing principal residence using some creative strategies:
$$ Take advantage of the credit upfront at closing to apply towards the down payment and settlement costs using certain FHA and state financing options.
$$ Utilize seller financing to provide alternative financing for buyers even when banks turn down a conventional mortgage loan. For details on the IRS approval of using the installment sale with the tax credit read Does Seller Financing Qualify for the $8,000 First Time Home Buyer Tax Credit?
$$ Combine the $6500 move-up/repeat home buyer tax credit with the $250,000 or $500,000 capital gain tax exclusion. You’ll notice the definitions of principal residence are pretty much identical.
$$ Provide baby boomers and retirees a motivation and opportunity to downsize since a more expensive home is not required to qualify for the tax credit.
$$ Use the tax credit with the purchase of a short sale, foreclosure, or other distressed property to take advantage of low real estate prices and tax savings.
While many argue the tax credit is not a silver bullet for the ailing economy it will hopefully serve the intended purpose of reducing housing inventory and stabilizing the real estate market.
Taxes are tricky stuff and nothing in this article is intended as legal or tax advice. Be sure to discuss your particular situation with qualified tax and legal professionals. You can also review these additional online resources:
Frequently Asked Questions about the Revised First Time Home Buyer Tax Credit from Federal Housing Tax Credit site.
Frequently Asked Questions about the New Move-up or Repeat Home Buyer Tax Credit for existing home owners from Federal Housing Tax Credit site.
Author: Article written by Tracy Z. Rewey of www.noteinvestor.com and may only be reprinted with appropriate credit and links to author.