Tax Quarry

The recent financial crisis has created a very slow housing market.  We have witnessed thousands upon thousands of homeowners who have either lost their homes to foreclosure after losing a job; or lost their homes after their mortgage terms have changed and higher interest rates kicked in.  As a result, people are not as eager to enter into the housing market as they were a few years ago and current homeowners are not finding it easy to sell their homes much less sell at a profit. 

Well, for a lot of people, especially first-time home buyers, this spells opportunity.  The first-time homebuyer group will be lucky enough not to own a home they need to sell before they can move into their new house- something that has handicapped so many other potential purchasers.  This group can also take advantage of the First-Time Homebuyer Tax Credit offered by the government, which was introduced as part of a package of tax incentives expected to stimulate the housing market. The credit, initially put into place by the Bush administration, has been extended and modified by the Obama administration.  One notable change is the ability for not just first time buyers, but long-time residents to claim this credit.    

If you are lucky enough to fit into this category of people and have purchased a home in 2009 (or are planning to purchase a home in early 2010) there are a few things the IRS want you to know about the tax credit before you purchase that home and file your tax return.   

(1)    You must buy – or enter into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you enter into a binding contract by April 30, 2010, you must close on the home on or before June 30, 2010.

(2)    To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.

(3)    To be considered a long-time resident homebuyer you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased. Additionally, your settlement date must be after November 6, 2009.

(4)    The maximum credit for a first-time homebuyer is $8,000. The maximum credit for a long-time resident homebuyer is $6,500.

(5)    You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Therefore, if you claim the credit you will not be able to file electronically.

(6)    New homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the dated certificate of occupancy. Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract.

(7)    If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

For more information about these rules including details about documentation and other eligibility requirements visit IRS.gov/recovery or search for “New Homebuyer Credit – Claim It” on You Tube.

Cheers,

February 10, 2010

Marsha Henry