Article Tax Credit by Arthur C Jones by liamei12345


									Homebuyer Tax Credit: New and Improved

Welcome news for prospective home buyers and sellers has come in the form of a federal
tax credit extension. President Obama signed the Worker, Homeownership and Business
Assistance Act of 2009 into law on November 6th, extending and expanding a popular tax
break for home purchasers.

An existing $8,000 tax credit for first time homebuyers was set to expire on November
30th. It was first enacted by economic stimulus legislation in April 2008 and modified in
February 2009. The Treasury Department reported that over 1.4 million Americans have
claimed the credit at a cost of $10 billion. Many economists believe the tax break has
helped stabilize the real estate market, as evidenced by increasing existing home sales for
four consecutive months between April and July 2009. Home sales again surged 9.4% in
September as purchasers rushed to meet the deadline for the tax credit expiration,
according to the National Association of Realtors. The Zillow Home Value Index
remained relatively flat between the second and third quarters this year, signaling a
possible bottoming out of housing prices nationally.

It was widely feared that without an extension of the tax provision, the nascent recovery
in the housing market could reverse course, sliding into a “double dip”. Under intense
lobbying from housing industry groups, the U.S. Senate passed the bill unanimously, and
the House voted overwhelmingly (403-12) in favor of passage. The new legislation:
      Extends the deadline(s) for purchasing a home
      Authorizes the credit for replacing a residence
      Raises the income limits for those claiming the credit

The deadline for purchasing a home has been reset to April 30th, 2010. This means that a
buyer needs to sign a binding purchase agreement by then. Eligible individuals entering
binding purchase contracts prior to April 30th will then have until June 30th to go to

The new home must be a principal residence. If it is sold or no longer used as a principal
residence within three years of purchase, the tax credit must be repaid.

A new enhancement to the homebuyer tax credit is that it has been expanded to include
homebuyers that presently own a home. A present homeowner must have lived in the
same principal residence for any five consecutive years of the last eight years ending on
the date the new replacement home is purchased. The maximum tax credit for
replacement home purchasers is $6,500 for single individuals or married persons filing
jointly. Married taxpayers filing separately are limited to a $3,250 tax credit.

First time buyers can receive a tax credit up to $8,000 if they are single or married filing
joint returns. A first time homebuyer is defined as someone who has not had an
ownership interest in a principal residence for three years prior to buying a home.
Married first time buyers filing separately are limited to a $4,000 maximum credit. In all
cases, whether first time or replacement buyer, the tax credit also caps out at 10% of the
purchase price up to the limits previously discussed.

The income limits which are applied to determine eligibility have been increased by the
new law. Single individuals with modified adjusted gross income (MAGI) of up to
$125,000 are now eligible. This is much higher than the $75,000 limit previously in
force. Married homebuyers filing jointly will be eligible with MAGI up to $225,000
going forward. This compares favorably to a $150,000 limit in effect prior to November
6th. There will be a phase out of the credit for buyers with income up to $20,000 higher
than these limits.

Like before, the tax credit is fully refundable. It is a dollar for dollar reduction in the
amount of federal tax liability on the part of the taxpayer. If the filer’s tax liability is less
than the credit, they receive a refund check (or deposit) from the Treasury. If there is no
liability, the full amount is refunded or added to the refund due the taxpayer.

Luxury home purchases are excluded from the tax break, as the maximum sale price of an
eligible transaction will be $800,000.

Some additional provisions are made for active duty military personnel. These include an
extended deadline to complete a purchase, and certain exemptions from repayment of the
credit when servicepersons are redeployed.

To claim the credit, taxpayers must file form 5405 with their federal income tax return.
Those who buy homes this year will file with their 2009 US 1040. Purchasers in 2010
will have the option of filing for the credit with either their 2009 or 2010 tax return,
according to the IRS website. Under no circumstances can an individual claim the credit
before closing on a purchase. As a fraud prevention measure, the IRS will now require
the taxpayer attach evidence of a home purchase (such as a settlement statement) to any
tax return claiming the homebuyer tax credit.

Passage of this legislation has created new opportunities for prospective buyers and
sellers of residences. Would-be buyers who thought the credit would expire in November
now have until April to purchase. A larger pool of buyers now benefits; those that
presently own a residence and those with higher incomes. Even those sellers who cannot
claim the tax break will likely benefit from increased buyer traffic and motivation.
Anyone considering buying or selling a home in 2010 should be aware of the timetable
involved with this law and take full advantage of its impact to optimize the transaction.
Always seek the advice of qualified tax and real estate professionals to best understand
how the new rules might apply to your individual situation.

             Art Jones is a Loan Officer with Prosperity Mortgage Company in Blue Bell
         He can be reached at 215-654-5927 or

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