Questions and answers about the home-buyer tax credits

By Kevin McCormally
Sunday, April 25, 2010

Time is running short if you want to cash in on the popular home-buyer tax credits. You'll need to sign a binding contract by April 30 and then close the deal by June 30. With thousands of dollars at stake, it's not surprising that potential home buyers have lots of questions. We have the answers.

$8,000 or $6,500? Why are there two different amounts?

The $8,000 credit is for "first-time buyers" -- though you should note that it isn't really restricted to first-timers. You're considered a first-time buyer if you have not owned a home for at least three years prior to the date you settle on your new home. The $6,500 credit was added starting Nov. 7 -- it's for longtime homeowners who buy a new home. To qualify for this one, you must have owned and lived in the same principal residence for five of the eight years leading up to the purchase of your new home.

I've got a contract, and I'm set to close in May. But my taxes were due April 15, of course. Can I still claim the credit on my 2009 return?

If you close on a home in 2010, you can claim the credit on your 2009 or 2010 return. Sooner rather than later is the choice to make. You'll need to file a Form 5405 to claim the credit and include a copy of your settlement statement (such as the HUD 1 form) to prove that you bought the house.

You can either file for an extension to push your deadline back to Oct. 15 -- and then file your 2009 1040, including the credit after you close on your new home -- or file by April 15 without the credit and then file an amended 2009 return using Form 1040X.

We are planning to sell our home and retire to a smaller place. Is the move-up credit available only if you buy a more expensive home?

Don't worry. "Move-up" is a misnomer often used to distinguish the longtime homeowner (or longtime resident) credit from the first-time buyer credit. It's okay to downsize. There are no rules about the cost of the house you sell or the home you buy (except that the new house can't cost more than $800,000).

We seem to qualify for the longtime resident credit and are contracted to buy a house for $240,000. My agent is telling me the credit is $2,400. I thought we got $6,500.

The credit is 10 percent of the purchase price, up to a maximum of $6,500 -- so you should get the full $6,500 unless your income is "too high." The right to claim the credit disappears as adjusted gross income rises between $125,000 and $145,000 on a single return and between $225,000 and $245,000 for married couples who file joint returns. (Lower income limits applied before Nov. 7.)

Can I claim the credit for the purchase of a beach house? How would the IRS know whether I was living there full time?

The credits are available only for the purchase of a principal residence. As for how the IRS might know a new house is a vacation property, the fact that your tax return was filed from a different address than the address of the new property (which will be shown on the settlement sheet) might raise some eyebrows. If the IRS concludes that a claim is fraudulent, in addition to taking back the credit it could slap you with a 75 percent penalty, which would be $6,000 on an $8,000 credit claimed for a vacation home. Although it rarely happens, tax fraud could lead to a jail term.

We bought a home on Oct. 15, 2003, and sold it in August 2008. So we owned the home for slightly less than five years. We are living in Arizona now and renting an apartment. We are looking to buy a home. Do we qualify for the first-time home-buyer tax credit as amended, assuming that we pass the necessary income tests?

Sorry, but based on the facts you present, you're out of luck. To qualify for the first-time buyer credit, you can't have owned a home within the previous three years. You sold your home less than two years ago. And it appears that your ownership of that home was a few months shy of five years -- the minimum period of continuous ownership required to qualify for the longtime resident credit.

I recently have gone through a divorce. In my settlement, I gave our family home to my ex-wife. We lived there for almost eight years together. Since then, I have bought another house for myself. My question is, since I didn't technically sell my house, can I still qualify for the tax credit on my new property?

Yes, you can qualify. There is no requirement that you sell your previous home, just that you buy a new one within the time parameters of the home-buyer credit. Whether you qualify for the $6,500 longtime resident credit depends on when you bought the new home. That credit is available only for purchases after Nov. 6, 2009. If you bought after that date, you can qualify for the credit if you owned and lived in the same principal residence for five continuous years out of the eight years leading up to the purchase. From your e-mail, it sounds like you pass that test. For what documents you need to send in with your return, see the instructions for Form 5405.

-- Kiplinger.com


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