Guide to the First-Time Homebuyer Credit
Uncle Sam helps pay the cost of buying a home
By Kaye A. Thomas
Posted February 27, 2009
For homebuyers who haven't owned a home in the previous three years.
Qualifying homebuyers in 2008 can claim a tax credit of up to $7,500 that works as an interest-free loan toward the purchase of a home. For qualifying purchases in 2009, the maximum credit increases to $8,000 and the repayment requirement does not apply if the property remains your main home for at least three years. People buying in 2009 are allowed to claim the credit on their 2008 tax returns, quickly getting the money in the form of a tax refund. The credit is refundable, meaning you can claim the full amount even if it exceeds your total tax for the year. It's phased out for taxpayers at higher income levels, however.
Who's eligible
To claim this credit you must be a "first-time homebuyer," but this term includes previous homeowners provided they have not owned a home at any time in the three years ending on the date of purchase. If you're married, your spouse must meet this requirement as well. The credit isn't available to nonresident aliens.
Qualifying purchase
Your purchase will have to meet several requirements for you to claim the credit:
- You have to buy a home in the United States. You don't qualify if you acquire the home by gift or inheritance.
- You have to buy from an unrelated person. For this purpose you're considered related to your spouse, ancestors (parents, grandparents, etc.) and lineal descendants (children, grandchildren, etc.) as well as entities (partnerships, corporations, etc.) if you directly or indirectly own more than 50%. That means you can claim the credit for a purchase from other relatives, such as a sibling.
- The purchase has to occur on or after April 9, 2008 and on or before November 30, 2009. For this purpose, if you build a home you're treated as purchasing it on the first day you occupy it.
- You have to use the home as your principal residence.
- You have to continue owning the home and using it as your principal residence through the end of the year for which the credit is claimed.
- For purchases in 2008, your purchase can't be financed by a mortgage provided with tax-free financing.
District of Columbia. There's a separate $5,000 credit for first-time homebuyers in the District of Columbia. Purchasers in 2008 who are eligible for the DC credit, or were eligible for that credit in any previous year, cannot claim the federal credit. Purchasers in 2009 can claim the federal credit even if they qualify for the DC credit or claimed it in an earlier year, but in this case they cannot claim the DC credit for the same purchase that allows them to claim the federal credit.
Principal residence
Your principal residence is your main home, the place where you live most of the time. It doesn't have to be a house. A condominium, cooperative apartment, or even a houseboat or housetrailer can qualify if it's your main home.
Maximum credit
The maximum credit is $7,500 for purchases in 2008 and $8,000 for purchases in 2009. The maximum is the same for single taxpayers and married couples filing jointly. If you're married filing separately, the maximum is half that amount.
The credit is limited to 10% of the purchase price of the home. If you buy a home for $60,000, for example, your maximum credit is $6,000.
Phased out
The credit is phased out beginning when your income exceeds $150,000 if married filing jointly or $75,000 otherwise. (For this purpose, "income" means your adjusted gross income after adding back certain items that may be excluded when working outside the United States or in U.S. possessions.) The range for phasing out the credit is $20,000, so that for example you would get half the credit otherwise available if your income was $10,000 above these amounts. The credit is completely eliminated when your income reaches $170,000 if married filing jointly or $95,000 otherwise. This phase-out is only for the purpose of determining the amount of the credit in the year of purchase, so going over the income limit in subsequent years will have no effect.
Claiming the credit
Claim this credit by attaching Form 5405 (PDF) to your tax return for either 2008 or 2009. The amount determined on this form is transferred to line 69 of Form 1040 (2008 version). The credit is refundable, so you can receive the full credit even if it exceeds the amount of tax you paid for the year, or even if you paid no tax at all for the year.
Claiming 2009 credit on 2008 return. People buying in 2008 have to claim the credit on their 2008 income tax return, but people buying in 2009 have a choice: they can claim it on their tax return for either 2008 or 2009. The rules for a 2009 purchase will still apply if you claim the credit on your 2008 return (for example, you still won't have to repay the credit if this home continues to be your main home for three years). Just make sure you check the appropriate box on Form 5405 to let the IRS know this is a 2009 purchase.
If you're planning a purchase in 2009 that may occur after April 15, it may make sense to file for an extension so your tax return isn't due until October 15. You don't have to do this, however, because you're allowed to claim the credit on an amended return. If you already have a large refund coming on your 2008 tax return, for example, you might want to file quickly for that refund and then amend the return after closing on your home purchase to obtain an additional refund of up to $8,000.
Normally it will make sense to claim the credit for a 2009 purchase on your 2008 return, even if this requires an amendment to the return, because you'll get the money faster. It appears, however, that the income phase-out described above applies based on your income for the year you claim the credit, not your income for the year you bought the home. If your income for 2008 is high enough to reduce the credit but your 2009 income is lower, you may benefit by claiming the credit for a 2009 purchase on your 2009 return.
Joint purchasers
Married taxpayers who claim the credit on a joint return are treated as each claiming half the credit. This could be important in the case of a later divorce or death of one of the spouses.
The law says the IRS can allow the credit to two unrelated purchasers provided that the total credit allowed on the purchase of a single home doesn't exceed the maximum described above. The instructions for Form 5405 say, "If two or more unmarried individuals buy a main home, they can allocate the credit among the individual owners using any reasonable method. . . . A reasonable method is any method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit." The second sentence seems to be saying that just about any allocation will be considered reasonable, including one that allocates all the credit to one co-owner in a situation where the other co-owner does not qualify for the credit.
Repaying the credit
If you claim the credit for a purchase in 2008 you have to repay the credit over a period of 15 years (or faster if the home ceases to be your main home before that period is up). If you claim the credit for a purchase in 2009 you won't have to repay the credit unless the home ceases to be your main home within three years after the purchase.
