Tax Credit

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June 13th, 2004 admin

Tax Credit

The First Time Home Buyer Tax Credit

Have you been asked by your clients about the First Time Home Buyer Tax Credit? As a mortgage professional, you can build trust and loyalty with your clients if you have a basic understanding of the credit and how it can impact their decisions when applying for a loan.

Use it as a marketing tool to talk with your clients who are thinking about buying a home (first time home buyers ) and will working with you for the loan. Use it as a reason to call clients you haven’t talked with in a while (shame on you) to give them information. It can also be a great way to introduce yourself to real estate agents who deal with first time home buyers.

Surprisingly, many first time home buyers have never heard of the tax credit, or they misunderstand how it works. The most common misconception is that it can be used toward their downpayment. This is NOT correct. It is a TAX CREDIT that can be claimed on a 2008 tax return (filed by April 15, 2009), an amended 2008 tax return, or on a 2009 tax return.

The 2009 Tax Credit

The First Time Home Buyer Tax Credit was originally passed by Congress in 2008. It was a $7,500 tax credit that went into effect on April 8, 2008 and expired on July 1, 2009. The big negative was that it had to be REPAID over a 15 year period, so basically it was a loan – not a credit.

The good news is that in February 2009, Congress increased the tax credit to $8,000 (or up to 10% of the purchase price, so if the purchase price is $78,000, the credit is $7,800.) and removed the repayment requirement. It is for homes purchased and closed from January 1, 2009 to November 30, 2009. For homes purchased in 2008, the tax credit still must be repaid.

How does a this work?

To realilze just how beneficial this can be, you need to understand how a tax credit works. Basically, every dollar of a tax credit reduces the income tax by a dollar. Once a qualified purchaser has calculated his/her total tax due (after deductions, exemptions, etc), tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 – $8000 = $1500).

Great incentive to get first time home buyers off the fence and get pre-approved for a loan!

Does your client need to apply for the tax credit?

There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

Is there an income restriction?

Yes. The income restriction is based on the tax filing status the purchaser claims when filing their income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

That being said, singles and couples who make more may still receive a partial credit, as there is a “phase out” range. For singles, the credit phases out between $75,000 – $95,000. For married filing jointly, the credit phases out between $150,000 – $170,000. This means that singles who make over $75,000 and couples who make over $150,000, the credit is proportionately reduced as income approaches $95,000 and $170,000 respectively.

For example, if a couple makes $165,000, the excess amount is used to create a fraction 15,000/20,000 (.75) times the credit amount. 75% or $6,000 of the credit would be disallowed. They would still get a $2,000 credit.

Who Qualifies as a First Time Home Buyer?

A first time home buyer is someone who has not owned a home any time during the 3 years prior to the date of purchase. For married joint filers, both must meet the first time home buyer test to take the credit on a joint return.

The house being purchased must be owner occupied and it must be located in the United States. It is very important to note there is a 3 year residency rule, which means if the house is sold prior to 3 years of ownership, the tax credit must be repaid.

NAR (National Association of Realtors) has estimated that hundreds of thousands of new buyers could enter the market due to the First Time Home Buyer Tax Credit. Just imagine what that would do for your business! For more details and updated specifics of the tax credit, you should always advise your clients to talk with a tax expert or CPA.

About the Author

Marcy Ruberto, editor at MortgagePro News, invites all mortgage brokers and originators to learn crucial strategies to build their business at http://www.mortgagepronews.com. Take advantage of our free webinars and seminars, use our free resources, and get your questions answered by our experts. Act now and get free tools to build your business at http://mortgagepronews.com/mpn-freebies.

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