By Benny L. Kass
Friday, February 25, 2011; 10:25 AM
If you have been on active military duty outside of the United States for at least 90 days between Jan. 1, 2009, and April 30, 2010, or if you were on qualified official extended duty or a member of the Foreign Service during that time span, you may still be eligible to claim the first time homebuyer tax credit.
This is the result of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed into law by President Obama on Dec. 17.
The homebuyer credit has been an important stimulus to the real estate market. The first attempt by Congress was merely to give consumers who bought houses in 2008 an interest-free loan of up to $7,500, which had to be repaid to the government over a period of 15 years. The second attempt (for purchases in 2009) raised the amount to $8,000, and was a true credit that did not have to be repaid.
But the credit program ended for home purchases after Sept. 30, 2010. Taxpayers who bought their first homes before that date (and signed binding real estate contracts before May 1, 2010), are eligible for the credit when they file their 2010 tax returns.
Congress does, however, take care of our fighting men and women (and others who serve our country overseas). If you fall into these categories, you may still be eligible for a tax credit up to $8,000 if you purchase your first home before May 1, or you enter into a binding real estate sales contract before that date and will go to settlement before July 1.
There are a number of qualifications and restrictions attached to the credit. For example, no credit is available if your new home costs more than $800,000. The purchaser must be at least 18 years old. The IRS is looking very carefully at those claiming the credit, because some people have falsely claimed that their very young children were homebuyers eligible for the credit. Your income cannot exceed $125,000 (or $225,000 for joint tax filers) to get the full credit. For those with higher incomes, the credit diminishes; it disappears for those whose income is $145,000 (or $245,000 for joint filers) or higher.
You cannot claim the credit if you bought your house from a relative. The law defines that as including your spouse, children, grandchildren and grandparents.
According to the law, you are a first time homebuyer if you (and your spouse if you are married at the time of purchase) did not own another principal residence during the three years preceding the date you buy the new property.
Talk with your tax advisor if you have any doubt as to your eligibility.
If you bought your home last year and believe you are entitled to the tax credit, you must file form 5405, titled "First-Time Homebuyer Credit and Repayment of the Credit." This form, along with instructions, is available at irs.gov.
Although the IRS is actively encouraging taxpayers to file their tax returns electronically, it recently made it clear that because of the documentation required when you claim the credit, you must file a paper tax return. In addition to form 5405, you must attach a copy of your settlement statement (called the HUD-1), showing all parties' names and signatures, the property address, the contract sales price and the date of purchase. The IRS has made it quite clear that "if you do not attach the documentation, the credit may not be allowed."
If you just bought a house in the District of Columbia last year, but missed the Sept. 30 deadline, there is more good news. In the same law passed in the waning hours last December, Congress renewed the $5,000 D.C. homebuyer tax credit. In fact, if you meet the eligibility criteria, you can still get the credit if you are a first-time homebuyer in the District through the end of this year.
Unlike the three-year lookback for the federal credit, you are considered a first-time homebuyer if you have not owned a home in the District for one full year before you buy. The home must be your principal residence, and you cannot earn more than $110,000 per year if you file a joint tax return (or $70,000 if you are a single tax filer). The credit will be phased out as your income increases, and will not be available if you earn more than $130,000 for joint filers or $90,000 if you file on your own. It is a true credit; it never has to be repaid.
Interestingly enough, and again unlike the federal credit, you can still qualify for the D.C. credit even if you own property in another state. There's a form for this also: Form 8859, called appropriately "District of Columbia First-Time Homebuyer Credit," also available on the IRS Web site.
A tax credit will put money in your pocket. It is different from a deduction. According to Julian Block, a tax attorney in New York, "deductions merely reduce the amount of income on which taxes are figured. Credits are subtracted from the tax itself, resulting in dollar-for-dollar reductions of the tax that would otherwise be owed." (Block is the author of the real estate tax primer "Home Seller's Guide to Tax Savings.")
Let's look at this example to see how tax deductions and credits work. Samantha is in the 28 percent tax bracket. Last year, she paid $5,000 in mortgage interest to her lender. She itemizes her deductions and is able to deduct the $5,000, saving $1,400 on her income tax bill (28 percent of $5,000). But she was a first-time home buyer in the District and is eligible for the credit. Because it is a credit against the amount of tax she owes, this will save her the full $5,000.
That's a big difference. If you bought a house last year (or plan to buy one in the District this year) make sure that you take advantage of this valuable resource, if you meet the eligibility requirements.
Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.