Edward A. Zurndorfer, Certified Financial Planner

The American Recovery and Reinvestment Act of 2009 (ARRA) contains legislation that authorizes as much as an $8,000 tax credit for first-time homebuyers.

Under ARRA, qualifying individuals who purchase a primary residence before Dec. 1, 2009 can claim the tax credit on either their 2008 or 2009 federal tax return. Unlike the first-time homebuyer tax credit that was available to eligible individuals who bought their first homes during 2008, the 2009 tax credit does not have to be repaid.

The following requirements must be met in order for an individual to be considered a "first-time homebuyer":

• The home must be a principal residence. This includes a house, condominium or a mobile home that has eating, sleeping and toilet facilities. The home must be purchased between April 8, 2008 and Nov. 30, 2009. Vacation homes and rental property do not qualify for this credit.  
• The principal residence must be located in the United States. Territories of the U.S. are not included. 
• No other principal residence was owned during the three year period prior to the purchase of the newly purchased residence. This restriction applies to both spouses in the case of married individuals.  

An individual does not qualify for the credit until he or she acquires - and officially owns - a principal residence. A formal settlement on the residence must have been completed for the individual to be considered as an owner and occupant of the residence. The official purchase date for a newly constructed residence is when the owner occupies the residence.

An individual who qualifies for the first-time homebuyer tax credit will claim the credit on Form 5405. But the following individuals are ineligible for the credit: 

• Those with a modified adjusted gross income of $95,000 or more, or $170,000 if married filing jointly;  
• Nonresident aliens; 
• Those whose homes are located outside the United States;  
• Those who acquire the home by a gift or inheritance; and  
• Those who acquire the residence from a relative, including a spouse, parent, grandparent, child or grandchild.

The first-time homebuyer credit is a refundable credit equal to the lesser of: (1) $8,000 for qualifying purchase; or (2) 10 percent of the cost of a principal residence. The $8,000 is an increase from the $7,500 tax credit available for qualifying purchases that occurred during 2008.

A major difference between the 2008 and 2009 first-time homebuyer tax credits is that the 2008 $7,500 tax credit has to be "recaptured" on Form 1040 as an additional tax and is repaid in 15 equal annual installments, beginning with the second tax year after the tax year in which the home was purchased. The tax credit is therefore in reality a 15-year interest free loan from the government. Here is an example to illustrate.

Example 1

Allan, a single taxpayer, during 2008 purchased a residence that he uses as his principal residence. He is a first-time homebuyer and qualifies for a $7,500 tax credit in his 2008 return. Allan must include $500 ($7,500/15) as additional tax on his 2010 federal tax return and on each tax return for another 14 years, from 2011 to 2024. 

If Allan sells his home before the 15-year period is over, or if he (and his wife, if Allan gets married) ceases to use the home as a principal residence, the uncaptured portion of the credit must be recaptured in its entirety for the tax year of such disposition or cessation as a principal residence. 

The recaptured credit would also apply if the principal residence is converted to a business or rental property or if the home was destroyed, condemned or disposed of under threat of condemnation. 

Example 2.

The same information as in Example 1 except Allan sells his home in 2009 to his son. Allan must include $7,500 as additional tax on his 2009 federal tax return. 

For principal residences purchased during 2009, the first-time homebuyer tax credit does not have to be "recaptured" or paid back unless the residence ceases to be the individual's principal residence within the first 36 months of ownership. 

The IRS announced in March 2009 that individuals who bought their qualifying principal residence between Jan. 1, 2009 and Dec. 1, 2009 can claim the tax credit on their 2008 federal income tax return. The individual would then be able to claim the $8,000 tax credit during 2009 rather than waiting until the spring of 2010 to file his or her income taxes. If a 2008 federal income tax return has already been filed, then an amended 2008 federal income tax return (Form 1040X) can be filed in order to claim the $8,000 tax credit. 2009 first-time homebuyers also have the option of claiming the credit on their 2009 returns that are due April 15, 2010.

Those individuals who purchased their principal residences between Jan. 1 and Feb. 16, 2009 before the passage of the American Reinvestment and Recovery Act on Feb. 17, 2009, and claimed the $7,500 tax credit on their 2008 tax returns can file an amended return for the 2008 tax year. On the amended return they will be able to claim the additional $500 credit amount.

There has been a drive in both houses of Congress to extend the first-time homebuyer tax credit until June 1, 2010. There is also proposed legislation that would increase the credit to $15,000 and to allow anyone - not just first-time homebuyers - to be eligible for the credit.

Other legislation that will likely pass both houses of Congress is the extension of the current $8,000 tax credit for another 12 months for thousands of military, Foreign Service and intelligence personnel who have been posted abroad during 2009. The legislation would also prohibit the IRS from "recapturing" the $8,000 credit when service members are forced to sell or rent their residences because they are ordered to deploy to a different duty station.

The current national financial situation -- with interest rates at record lows and housing prices depressed in numerous areas of the country -- has resulted in now being an ideal time for first-time homebuyers to purchase a principal residence. Moreover, the $8,000 tax credit has resulted in helping first-time homebuyers afford their first residences. But time is running out:  to take advantage of the $8,000 tax credit, the deadline is Nov. 30, 2009 for first-time homebuyers to acquire their residences. Hopefully, Congress will pass legislation that will extend the credit, at least through May 2010.

About the Author 

Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, Maryland. He is also a registered representative with Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also located in Silver Spring, Maryland

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