The newest version of the first time homebuyer credit ($8,000) applies to anyone who purchases a home on or after January 1, 2009 through December 1, 2009. Anyone who purchased a home last year is eligible for the previous credit of $7,500. However, unlike this earlier version, the current $8,000 does not have to be repaid.
This credit is equivalent to 10 percent of the purchase price of the home, is capped at $8,000 and applies only to first time buyers and principal residences (as opposed to vacation homes). First time buyers are defined as someone who hasn't owned a principal residence for three years before buying a house. If a buyer owned a home three years ago, the date when the title was transferred is the day to use when calculating the three years. A buyer may have owned a vacation home--but not a principal residence--within the past three years, and still qualify for the credit.
The tax credit is subject to income limitations. Single buyers need a modified adjusted gross income of $75,000 or less to qualify for the full credit, that's $150,000 for married couples. Those earning more than these thresholds may be eligible for reduced credits. The tax credit is refundable so qualified buyers can take advantage of it even if they don't have much tax liability when filing taxes.
Since it is a tax credit, it will show up a tax refund for most people. A refundable credit means that if you pay less than $8,000 in federal income taxes, then the government will write you a check for the difference. For example, if you paid $4000 in taxes this year and after doing your taxes found out that the IRS owed you a refund of $1000, you would now get $9000 back. If you owed the IRS $1000 after calculating your taxes, you would then get a refund check of $7000 ($8000-$1000).
Taxpayers who qualify for the first-time homebuyer credit and purchase a home this year (before Dec. 1) have a special option available for claiming the tax credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year. This special feature can put money in first time buyers' pockets right now rather than waiting another year to claim the tax credit. The IRS has posted a revised version of Form 5405, First-Time Homebuyer Credit, on IRS.gov. The revised form incorporates provisions from the American Recovery and Reinvestment Act of 2009. The instructions to the revised Form 5405 provide additional information on who can and cannot claim the credit, income limitations and repayment of the credit.
In order to save up money for a down payment, prospective home buyers who qualify for the program but do not intend to purchase a home till the end of 2009, may elect to reduce their income tax withholding (up to the amount of the of the tax credit) which will enable the buyer to accumulate cash by increasing take home pay. However, if the purchase of the home does not occur, the taxes must be repaid to the IRS with possible interest charges and penalties.
Buyers have to own the home for at least three years in order to capitalize on the credit. If they sell the home before then, they will have to return the credit to the government. (Exceptions will be made in certain cases, such as death or divorce.)
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