07 Apr First-Time Homebuyer Tax Credit Myths
No matter where you own a home in the U.S. your real etstae purchase could qualify for the first time homebuyer credit. Oft confusing because even though it ended in 2010, the tax credit still applies for certain first-timers who purchased a home in 2008, 2009, or 2010. Find out if your real estate purchase qualifies and what you need to know to take advantage of it.
Myth #1: There’s no difference between a tax credit and a tax deduction
The first item to clear up about the first-time homebuyer tax credit program is that it isn’t a tax deduction; it’s a tax credit. Although both tax deductions and tax credits reduce your tax burden, a credit allows you to save more than a deduction does. How? If you have a tax credit of $1,000, for example, you reduce your tax burden by $1,000. But if you have a tax deduction of $1,000, your tax burden is reduced based on your tax bracket. So if you’re in the 28% tax bracket, for example, a $1,000 deduction would reduce your taxes by only $280.
Myth #2: The first-time homebuyer tax credit program still exists
First-time homebuyers can take advantage of the first-time homebuyer tax credit program only if the home was purchased between April 9, 2008, and April 30, 2010 (with a closing date no later than September 30, 2010). Different versions of the first-time homebuyer tax credit exist depending on when you bought your home, so this program still applies to some people but not to others.
Myth #3: There are no income limits to qualify
Depending on your income when you bought your home, you may not have qualified for the first-time homebuyer tax credit. People who bought homes between April 9, 2008, and November 6, 2009, could not earn more than $75,000 modified adjusted gross income (MAGI) or $150,000 MAGI for married couples. Between November 6, 2009, and April 30, 2010, this cap was raised to $125,000 MAGI and $225,000 MAGI for married couples.
Myth #4: Only first-time homebuyers can qualify
The definition of “first-time homebuyer” as it relates to the first-time homebuyer tax credit is broader than you might think. If you bought a home in 2008, you qualified as a first-time buyer if you didn’t own another primary residence in the three years leading up to your purchase. A special long-term-homeowner rule was added for people who bought a home between November 6, 2009, and early 2010. But the requirements were designed to weed out house flippers: to qualify, you must have owned and lived in a home for at least five out of the eight years preceding the purchase of a new home.
Myth #5: You have to pay back the entire tax credit
Depending on when you bought your home, you may not have to pay back the entire credit amount.
2008: The first-time homebuyer tax credit was part of the Housing and Economic Recovery Act of 2008. First-time homebuyers who bought a home between April 9 and December 31, 2008, could apply for a tax credit of up to $7,500 to be used on their 2008 tax return. But this “credit” was not really a true credit. A more accurate description would be to call it an interest-free loan, because it has to be completely paid back. If the full credit of $7,500 had been applied, for example, it has to be paid back over 15 years, at $500 a year, beginning in the 2010 income tax year.
2009: Big changes to the first-time homebuyer tax credit were made in 2009 under the American Recovery and Reinvestment Act of 2009. First-time homebuyers who bought a home between January 1, 2009, and December 1, 2009, could apply for a credit of $8,000, which they could apply to their 2008 or 2009 tax return. Under the new policy, the credit did not have to be paid back as long as the homeowner kept and lived in the home for three years.
2010: A couple of new additions were made to the first-time homebuyer tax credit program under the Worker, Homeownership, and Business Assistance Act, which was signed at the end of 2009. Anyone who planned to buy a new principal residence, not just first-time homebuyers, could qualify for a credit up to $6,500. This credit could be applied to the 2009 or 2010 tax bill and, again, did not have to be paid back as long as the homeowner kept and lived in the home for three years. And in 2010, the income limits were raised.
Myth #6: You have to pay back the credit if you sell
If you took the credit back in 2008 and decide to either sell the home or stop using it as your primary residence before 15 years’ time (beginning with the 2010 tax year), the entire balance of the credit becomes due — with the following exceptions:
You sell but make no profit (applies to unrelated buyers only).
You die. (Your estate isn’t responsible.)
Your home is destroyed or condemned.
You transfer your home to your ex as part of a divorce settlement.
If you took the credit in 2009 or 2010 and sold the home or stopped using it as your primary residence before the three years ended, you were required to pay back the credit. Continue reading > > >