Frequently Asked Questions

Understanding the Credit

  1. What's this new home buyer tax incentive for 2009?
  2. Who is eligible to claim the $8,000 tax credit?
  3. What is the definition of a first-time home buyer?
  4. What types of homes will qualify for the tax credit?
  5. What is the definition of "principal residence"?
  6. Are there any restrictions on the location of the property?
  7. Are there restrictions related to the financing for the mortgage on the property?
  8. Is there an income restriction?
  9. How is income determined?
  10. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
  11. Does the tax credit have to be paid back to the government?
  12. Do 2008 purchasers still have to repay their tax credit?
  13. Is a tax credit the same as a deduction?
  14. What happens if the purchaser is eligible for an $8,000 credit but only has an income tax liability of $6,000?

Practical Questions

  1. How do I apply for the credit?
  2. So I can't use the credit amount as part of my down payment?
  3. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
  4. I haven't even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?
  5. If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
  6. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
  7. If I claim my 2009 $8,000 credit on my 2008 return, will I have to repay the credit just as the 2008 credits are repaid?
  8. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7,500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7,500 credit?
  9. I bought a home in 2008. Do I qualify for this credit?
  10. What if I purchase later this year but can't get to settlement before Dec. 1?
  11. I have a home under construction. Am I eligible for the credit?
  12. I made an eligible purchase of a principal residence in May 2008 and claimed the $7,500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8,000 credit as well?
  13. I am not a U.S. citizen. Can I claim the tax credit?
  1. What's this new home buyer tax incentive for 2009?
    The 2008 $7,500 repayable credit is increased to $8,000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8,000 amount. If the house costs less than $80,000, the credit will be 10 percent of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7,500. It is available for the purchase of a principal residence on or after Jan. 1, 2009, and before Dec. 1, 2009.
  2. Who is eligible to claim the $8,000 tax credit?
    First-time home buyers purchasing any kind of home (new or resale) are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after Jan. 1, 2009, and before Dec. 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.
  3. What is the definition of a first-time home buyer?
    The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualify for the first-time home buyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
  4. What types of homes will qualify for the tax credit?
    Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.
  5. What is the definition of "principal residence"?
    Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50 percent). It is also defined as "owner-occupied" housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.
  6. Are there any restrictions on the location of the property?
    Yes. The home must be located in the United States. Property located outside the U.S. is not eligible for the credit.
  7. Are there any restrictions on the financing for the mortgage on the property?
    In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7,500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below-market loans to qualified buyers.)
  8. Is there an income restriction?
    Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Individuals who file a joint return may have income of no more than $150,000.
  9. How is income determined?
    For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.
  10. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
    Not always. The credit has a phase-out so that the closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. For this new credit, the credit amount is gradually reduced as an individual's modified adjusted gross income reaches $95,000 (single return) or $170,000 (joint return). Individuals with income above $95,000 ($170,000 joint return) will receive no tax credit.
  11. Does the tax credit have to be paid back to the government?
    No. There is no repayment for 2009 tax credits. However, one situation does require a recapture payment back to the government. If you claim the credit but then sell the property within three years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions apply. Note that this same three-year recapture rule applies, as well, to the $7,500 credit available for 2008. This provision is designed as an anti-flipping rule.
  12. Do 2008 purchasers still have to repay their tax credit?
    Yes. The $7,500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.
  13. Is a tax credit the same as a deduction?
    No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS. In contrast, a tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer's tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
  14. What happens if the purchaser is eligible for an $8,000 credit but only has an income tax liability of $6,000?
    This tax credit is what’s called a “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6,000, the IRS would send the purchaser a check for $2,000. The refundable amount is the difference between the $8,000 credit amount and the amount of tax liability ($8,000 - $6,000 = $2,000). Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

Practical Questions

  1. How do I apply for the credit?
    There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.
  2. So I can't use the credit amount as part of my down payment?
    No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.
  3. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
    Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take-home pay. This money can then be applied to the down payment.

    Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

    Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds.
  4. I haven't even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?
    You'll have a helpful choice that might speed up the process. Eligible home buyers who make their purchase between Jan. 1, 2009, and Dec. 1, 2009, can treat the purchase as if it had occurred on Dec. 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options.

    1. If they purchase between Jan. 1, 2009, and April 15, 2009, they can claim the $8,000 credit on the 2008 return due on April 15.

    2. They can extend their 2008 income-tax filing until as late as Oct. 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.)

    3. If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)
  5. If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
    Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on Dec. 31, 2008. This means that the 2008 income limit applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 income with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
  6. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
    Yes. If the applicable income phase-out would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using your 2008 income, then you can choose the year that yields the largest credit amount.
  7. If I claim my 2009 $8,000 credit on my 2008 return, will I have to repay the credit just as the 2008 credits are repaid?
    No. Congress anticipated this confusion and has made specific provisions so that there would be no repayment of 2009 credits that are claimed on 2008 returns.
  8. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7,500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7,500 credit?
    No, you would qualify for the $8,000 credit. Eligible purchasers who have already claimed the $7,500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.
  9. I bought a home in 2008. Do I qualify for this credit?
    No, but if you purchased your first home between April 9, 2008, and Jan. 1, 2009, you may qualify for the original $7,500 tax credit.
  10. What if I purchase later this year but can't get to settlement before Dec. 1?
    The credit is available for purchases before Dec. 1, 2009. A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before Dec. 1, 2009, for purchases to be eligible for the credit. Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.
  11. I have a home under construction. Am I eligible for the credit?
    Yes, so long as you actually occupy the home before Dec. 1, 2009.
  12. I made an eligible purchase of a principal residence in May 2008 and claimed the $7,500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8,000 credit as well?
    No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time home buyer.

  13. I am not a U.S. citizen. Can I claim the tax credit?
    Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.

Sources: The National Association of REALTORS® and the National Association of Home Builders

This is information is accurate based on information available as of Feb. 19, 2009. As with any tax law change, check with a tax advisor if there are any questions regarding using this provision.