First Time Home Buyers - $8000 Tax Credit

Tax credit aims to boost first-time home buyers, but know the rules before you make a claim.

If you're planning to buy a home between Jan. 1, 2009, and Nov. 30, 2009, you may be eager to take advantage of the federal government's latest effort to jump-start the nation's moribund housing markets: a tax credit of up to $8,000 for certain home buyers. The credit may appear to be an attractive opportunity, but you should be sure you read the fine print before you elect to claim it on your federal tax return.
 
The Rules
  • Not a deduction, but rather a true credit (your federal income tax liability will be reduced dollar-for-dollar up to the amount of the credit you're entitled to take)
  • The tax credit is not repayable to the government. The American Recovery and Reinvestment Act (the $787 billion stimulus Congress passed in February) made this much more generous to the taxpayers.  The law eliminated the obligation to repay the credit, provided that the home continues as the taxpayer's principal residence for at least three years.  
  • The full credit is available only to single filers with a modified adjusted gross income of $75,000 or below, and couples with a MAGI of $150,000 and below. If you're single or a married head of household and your MAGI is more than $75,000, but less than $95,000, you may get a partial credit, subject to a complicated formula. The same is true if you're married, filing jointly, and your MAGI is more than $150,000, but less than $170,000. If your MAGI is more than those limits, you're not eligible.
  • The tax credit is restricted to "first-time home buyers," but the definition includes anyone who didn't have an ownership interest in a principal residence during the prior three years. If you're married, both you and your spouse must fit that definition.
  • The tax credit may be taken only for a principal residence, a home where you plan to live most of the time. The home may be a detached house, condominium, townhouse, manufactured (aka mobile) home or houseboat. It must be located in the United States. A home purchased from a "related party" (e.g., a parent or sibling) is not eligible.
  • Technically, the credit is equal to 10 percent of the purchase price, up to a maximum of $7,500. Thus, if the home is worth less than $75,000, the maximum credit is 10 percent of the price, and if the home is worth $75,000 or more, the maximum credit is $7,500. Married couples who file separate tax returns can claim half the credit on each return.
  • The home must be purchased after Jan 1, 2009, but before Nov 30, 2009. Since the law was enacted July 30, 2008, part of that time frame is retroactive. That means if you already bought a home after April 9, 2008, but before July 30, 2008, you can still take the credit.
  • For purposes of determining your eligibility, the IRS will look at your income in the year you claim the credit, not the year in which you purchased the house.  You should consult a tax professional to help with determination of your eligibility.