The Lowdown on the First-time Homebuyers’ Tax Credit

Written by Diana Lundin

Still sitting on the fence about buying your first home? If you want to take advantage of the federal government’s tax credit of up to $8000, you have until the end of November. But there are a lot of other good reasons for buying now.

Along with the tax credit, low interest rates and a large existing-home inventory as well as incentives from new-home builders make it a buyer’s market in many areas of the country.

Real estate experts say if you have good credit, a steady income and want to take on the responsibilities of home ownership, it’s a great time to buy your first house. But because it often takes weeks for first-time buyers to find a home, it pays to have everything lined up for the purchase that should optimally take place no later than mid-November. . You should have all documents in order, including pay stubs, bank statements and tax returns. You should get pre-approved (not pre-qualified) for a loan so that you can be ready to act when you find a house. And you shouldn’t make any credit purchases before buying the home as that can affect your closing. Lastly, make sure you have your closing costs lined up. Those often have to be paid for in cash.

To take advantage of the credit, here’s what you need to know.

What is the credit?
The first-time homebuyer credit is a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.  This year, the credit was expanded for homes bought in 2009. Compared to 2008’s credit, the 2009 tax credit doesn’t need to be repaid unless you move out of the home as your principal residence within 36 months.

How much is the credit?
For 2009, the credit is 10 percent of the purchase price of the home with a maximum credit of $8,000 for either a single taxpayer or married couples filing joint returns.

Which home purchases qualify for the first-time homebuyer credit?
Any home in the United States purchased between April 8, 2008 and Dec. 1, 2009 as your principal home is eligible for the credit. For newly constructed homes, the first day you move in is considered to be the purchase date.

Who is considered to be a first-time homebuyer? 
Anyone who hasn’t owned another principal residence at any time during the three years before the date of purchase.

When do I have to buy a new home to get the credit?
The home must be purchased before Dec. 1, 2009, in order to obtain the credit. For a home you construct, the purchase date is considered to be the date you first occupy the home.

How do I apply for the credit?
Claim your credit on the IRS’ Form 5405, Form 5405, First-Time Homebuyer Credit, and file it with your 2009 federal income tax return.

Are there income limits?
Yes. Higher-income taxpayers may not qualify for part or all of the credit. The credit will be reduced or phased out for single taxpayers in the $75,000 to $95,000 range, based on your modified adjusted gross income. For couples filing joint returns, the rate is $150,000 to $170,000.