If you missed out on the enticing $8,000 tax credit available to first time homebuyers because you already owned a home, fear not—you can still take advantage of government incentives to drive home sales.
In an effort to keep the housing market stable during the winter months, a traditionally slow time for real estate, President Obama signed legislation on November 6 expanding the housing credit to so-called “move-up” home buyers—owners who want to trade their existing properties for something better.
The expansion, which was part of a bill that includes extending unemployment benefits, allows for a $6,500 federal tax credit for anyone looking to switch their primary residence.
Who’s eligible to claim it
• Homeowners who’ve lived in their current home, which must be a primary residence, for at least five out of the last eight years.
• Individuals with an income of less than $125,000, or married couples with an income of less than $225,000 (whereas the $8,000 first time home buyer tax credit was only open to individuals earning less than $75,000 or married couples earning less than $150,000).
• Those looking to buy a new home with a purchase price of $800,000 or less—it doesn’t matter if the home is brand new construction on a pre-owned lot, an existing single-family home, a condo, a trailer or a house boat…as long as it’s a primary residence. Second homes, vacation homes, investment and rental properties are not allowed.
You don’t even have to trade up if you don’t want. The tax credit can be used to downsize by moving into something smaller or relocate because of a job change. You also don’t have to sell your current home—you can rent it out, turn it into a second home or list it for sale at a later date when prices might be higher.
When to claim it
• Now. The legislation went into effect the day it was signed (November 6). You can claim the credit as soon as you close on a qualifying home.
• Before the cut-off date for settlement: June 30, 2010.
• If you close on a new home between Nov. 6 and Dec. 31, you can claim the credit on your 2009 federal tax return or amend your 2008 return. If you purchase a home in 2010, you can file for the credit on your 2009 or 2010 return.
How to claim it
• Submit copies of your settlement statement (HUD-1 forms) along with a request for the credit using IRS Form 5405.
Keep in mind that a tax credit is not the same as a tax deduction. A tax credit is a dollar-for-dollar reduction in what you owe at the end of the year. So if you owe $7,500 in income taxes and receive the $6,500 tax credit, you would owe $1,000 to the IRS. Similarly, if you had a federal income tax liability of $5,000 and tax withholdings of $4,000 for the year, you would owe $1,000 to the IRS. But if you qualified for the $6,500 tax credit, you would receive a check for $5,500 ($6,500 minus the $1,000 owed).
Lastly, don’t even think about fudging your federal tax return to claim this credit. It’s been reported that the IRS is being extra vigilant about sussing out fraudulent claims, the result of some 90,000 ineligible claimants (including one from a four-year-old child!) to the initial $8,000 tax credit for first-time home buyers earlier this year. A high percentage of claimants turned out to have already owned a home and nearly 600 supposed first-time home buyers turned out be younger than 18 years old, a violation of the rules (the credit prohibits sales to minors and between immediate family members).
The IRS has responded by opening 115 criminal investigations (so far) and temporarily freezing more than 110,000 refunds. In other words, this is not an area to get creative with on your tax return. And don’t wait around for another tax credit to come around again soon. All signs point to this being the last one, so take advantage of it while you can. More info at federalhousingtaxcredit.com/faq2.php.