The First Time Home Buyers Credit
WHAT IS THE FIRST-TIME HOME BUYER’S CREDIT AND HOW DOES IT WORK?
(BOTH BEFORE AND AFTER THE SIGNING OF THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009)

THE ORIGINAL 2008 ACT

In 2008, in an effort to stimulate the economy and the sales of residential real estate, Congress passed the First-Time Home Buyer’s Credit. The new law provided that a first time home buyer could realize a credit of up to 10% of the price of a home purchased between April 8, 2008 and July 1, 2009. The credit was limited to the lesser of $7,500 or 10% of the price of the home. The law provides that a home buyer purchasing a home between January 1, 2009 and July 1, 2009 could elect to treat the home as purchased in 2008 to take advantage of the credit in 2008.

The credit is available to either a single taxpayer or a couple filing a joint tax return. However, if a married taxpayer files a separate return the credit is limited to $3,750.

For higher income taxpayers the credit is phased out. Taxpayers filing a joint tax return with adjusted gross incomes of $150,000 begin to lose part of the credit. For single taxpayers the phase out of the credit begins at $75,000.

WHO IS A FIRST TIME HOME BUYER?

A first time home buyer is a taxpayer, including the spouse if married, who had no ownership in a principal residence during the three year period that ends on the date of the purchase of the home.

WHAT HOMES QUALIFY FOR THE CREDIT?

Most any home that serves as the principal residence will qualify for the credit so long as it is NOT purchased from a relative or descendent.

IS IT REALLY A CREDIT OR AN INTEREST FREE LOAN?

It depends on what one defines as a “credit.” As originally drafted, the credit is really an interest free loan. The Internal Revenue Service permits the taxpayer to take credit for up to $7,500 in the year the home is purchased, skip a year, and then start paying back the interest free loan over 15 years. The original law provides that if the home is sold, or ceases to be the principal residence before the full amount of the credit is recovered by the Internal Revenue Service, then the unrecaptured part becomes due in the year of sale or the year that the home is no longer used as the principal residence.

UNDER WHAT CIRCUMSTANCES IS THE CREDIT/LOAN NOT RECOVERED?

The original 2008 law provided three exceptions under which the credit would not be recaptured:

1. If the taxpayer dies,
2. In the event of a disaster (involuntary conversion) that makes the home uninhabitable so long as the taxpayer replaces the home within two years,
3. If the home is transferred to a spouse incident to a divorce. (But the spouse has to take on the payback obligation.)

EDITORIAL COMMENT:

Apparently the home buying public was not excited by the opportunity to borrow money interest-free from the government and paying it back over 15 years in order to buy a home. (Most of us would take an interest free loan whenever the opportunity presented itself.) In any event, on February 17, 2009, President Obama signed into law the AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009. The new Act attempts to improve on the original 2008 version of the First-Time Homebuyer Credit.

THE FIRST-TIME HOMEBUYER CREDIT AS AMENDED BY THE AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009

While all of the details are not yet available, the new Act makes some improvement to the Act as originally adopted.

First, and perhaps the most important change is that for homes purchased after January 1, 2009 the repayment obligation is eliminated. This change makes it a real honest credit and not an interest-free loan. As attractive as an interest-free loan might appear, not having to pay it back at all is even better.

Secondly, the home buying period is extended through November 2009 and increases the maximum amount of the “real” credit upward to a maximum of $8,000 or 10% of the purchase price of the home.

There is one part of the new Act that must not be overlooked! If the new home is sold within three years of the purchase date the credit amount is recaptured.

Home Mortgage Points

Question:
Are paid home mortgage points deductible on my income tax return?

Answer:
Generally the answer is “yes”… but not always.  It the home-buyer pays “points” to secure a loan that is used to acquire a principal residence or make improvements to a principal residence, then those points are generally deductible.  The loan must be secured by the taxpayer’s principal residence.  “Points” paid to buy a second home, a vacation home or to secure a home-equity line of credit are not deductible.

“Points” are deductible by the home-owner in the year paid.  The payment may be made from an escrow deposit, a down payment or an escrow deposit.  But if the points are paid from the proceeds of the loan, the points are not currently deductible.  In addition, to be deductible, the payment of points must be an established practice in the area where the home is located and not exceed the amounts generally charged as points in the area.

Deductible points may be labeled as “points,” “loan origination fees,” “discount points” or “loan origination fees” on the loan closing statement and must be calculated as a percentage of the loan amount.

Points paid to refinance a home loan are not current deductible, but must be amortized, or spread, over the term of the loan.  If a part of the refinancing is used to make improvements to the home, the points that relate to that portion of the new loan used to improve the home are currently deductible.

A home owner may make an election to amortize the “points” over the term of the loan rather than deduct the points in the year paid if the taxpayer receives no tax benefit in the year in which the points are paid.  That could occur if the taxpayer’s standard deduction is greater in the year in which the points are paid than the taxpayer’s itemized deductions in that year even including the points.  That situation could occur if the taxpayer, a first time homeowner, were to acquire a home near the end of the tax year.

Real Estate Property Tax Deduction

Question: As a home-owner, may I deduct my real estate taxes that I paid on my residence on my 2008 tax return?

Answer:

The deduction of residential real estate tax is a little more complicated for 2008, and 2009, than previously. Although the treatment of residential real estate is substantially the same as before, some taxpayers may fare somewhat better for 2008 and 2009.

Prior to the 2008 tax year, it was necessary for the homeowner to have enough itemized deductions on Schedule A, including the real estate tax, to exceed the standard deduction allowable for the year. (The 2008 standard deduction amounts are $10,900 on a Joint Return or Surviving Spouse Return, $8,000 for a Head of Household filer, and $5,450 on an Unmarried or Married, Filing Separate Return. There are some additions to the above amounts for taxpayers that are age 65 and over or are blind.)

For 2008 and 2009 a home owner that does not have enough itemized deductions to exceed the allowable standard deduction for their filing status may still get some benefit from the payment of residential real estate tax in addition to the full amount of the standard deduction. The homeowner may claim an additional standard deduction of $500 ($1,000 on a joint return). If the actual amount of real estate paid is less than these amounts, then the addition to the standard deduction is limited to the amount of real estate tax actually paid. Remember, as individual taxpayers we are on a cash-basis. That means the tax must be paid during the year in order to be a deduction for tax purposes. If your real property tax is paid by your mortgage company from an escrow account the taxpayer may only deduct the property tax if the mortgage company makes the tax payment by December 31.