The Obama administration, as part of the American Recovery and Reinvestment Act of 2009 has provided $288 billion in tax relief for individuals. As part of this relief, first time home buyers are able to claim an $8,000 credit on either their 2008 or 2009 tax return, depending on the closing date. This is a significant benefit for buyers, sellers and real estate investors alike. We wanted to provide you with a solid overview of the tax credit, and discuss what this means to anyone looking to buy or sell real estate soon. Here is an 8-point overview of the tax credit.
1. Who qualifies? As mentioned, this tax credit is for first time home buyers… kinda. It’s important to note that the IRS defines words a little differently than the rest of us. In this case, the language rules of the IRS actually benefit the individual seeking the tax credit. The IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase. So, even if you’ve owned five houses in your life, as long as you haven’t owned one in three years, you qualify as a first time home buyer.
2. How much is the credit? The actual amount of the tax credit is 10% of the home’s value, with a cap at $8,000. This is refundable, which means the IRS will actually send you a check for the entire amount of the credit with your tax return (granted you don’t owe the IRS taxes). CNN Money had a good 3-scenario rundown of filing results:
“Scenario 1: Your final tax liability is normally $6,000. You’ve had taxes withheld from every paycheck and at the end of the year you’ve paid Uncle Sam $6,000. Since you’ve already paid him all you owe, you get the entire $8,000 tax credit as a refund check.
Scenario 2: Your final tax liability is $6,000, but you’ve overpaid by $1,000 through your payroll witholding. Normally you would get a $1,000 refund check. In this scenario, you get $9,000, the $8,000 credit plus the $1,000 you overpaid.
Scenario 3: Your final tax liability is $6,000, but you’ve underpaid through your payroll witholding by $1,000. Normally, you would have to write the IRS a $1,000 check. This time, the first $1,000 of the tax credit pays your bill, and you get the remaining $7,000 as a refund.” (from CNN Money)
Regardless of what scenario you fall under, the bottom line is still… FREE MONEY from the United States Treasury! And, you can do whatever you want with it (invest, improve, save or spend).
3. What are the conditions? Back to the wordplay of the IRS… the word refundable means two things. One, you get the refund in your return. But there is another provision that says you have to refund the government for the tax credit if you do not maintain ownership of the property for at least three years. This is also known as “recapture,” in that the Government can capture the money back from you. It’s worth noting that the housing market is in a lull right now, and should rebound as the economy itself bounces back. There is a lot of room for optimism here – it is likely that the property that is available at such low prices today, will turn out to be a fruitful investment – hold on to it for three years and you will get to keep the $8K from the government, and profit thousands of dollars (probably tens of thousands) when you decide to resell.
4. When to file? In order to qualify for the tax credit, closing must happen between January 1, 2009 and December 1, 2009 (November 30 is the last day). The big date to note, though, was May 15 (2009). The importance of this date is that closings that were complete before May 15 can be filed on your 2008 tax return – even if you missed it when you filed, you can still file an amended return and get the credit now (most amended returns are mailed out within 3-5 weeks of filing).
5. How to file? In order to receive the tax credit, you need to a) file your taxes and b) file the First-Time Homebuyer Credit form (aka Form 5405). This form can be downloaded from irs.gov right here. Aside from your name, the address of the property and the date of acquisition, there are only six fields to fill in. The entire form is just two and a half pages, two of which are instructions.
6. Income Specifications. There are also income specifications that determine an individual or married couple’s eligibility for the tax credit. Individuals with a modified adjusted gross income of $75,000 or less qualify for the full credit, with the limit for married couples set at $150,000. Those with modified adjusted gross incomes above this amount, may still qualify for a percentage of the tax credit. According to the 5405 form, only those who make over $95,000 a year (or $170,000 for married couples) are ineligible for the tax credit altogether. Those within the $20,000 per year buffer can file for a reduced credit.
7. What does this mean for the real estate industry? As mentioned earlier, there is a lot to be optimistic about with this credit. First, it adds incentive for people in the market – potential home buyers – to get out there and buy a home. The CNN Money article referenced above points to two potential effects of the credit:
“…the $8,000 credit will bring an additional 300,000 new homebuyers into the market, according to estimates by Lawrence Yun, chief economist for the National Association of Realtors…The credit could also create a domino effect, he said, because each first-time homebuyer sale will lead to two more trade-up transactions down the line. ‘I think there are many homeowners who would be trading-up but they have had no buyers for their own homes,’ Yun said.”
8. What does this mean for real estate professionals? Real estate professionals should be very excited right now. Not only is there an influx of great valued properties on the market, but there is the impetus of this tax credit (specifically the time parameters of it). All the potential first time home buyers who were patiently waiting it out, now have an incentive to move swiftly, so that the closing is complete before the December 1 deadline. Professionals will be wise to learn and share all the information they can concerning this tax credit with potential clients – who will be all the more enthusiastic about buying a home, knowing they’ll have $8,000 to decorate with.
It’s not all that implausible to imagine that lenders will begin to accommodate short term loans for the amount of the tax credit. This will make home sales and closings more attainable, as it will free up guaranteed funds that can be used towards down payments.
