Payback time for homebuyer tax credit

There’s a lot of confusion surrounding the housing tax credits for first-time buyers. Here are some answers.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) — Question: I bought a home and qualified for the $8,000 first-time homebuyer tax credit. I’m still a bit confused, though, about the payback rules. Can you explain them? –Jessica G., Houston, Texas

Answer: Sure. But first I’d like to remind anyone who’s considering taking advantage of the first-time homebuyer tax credit of up to $8,000 that was part of this year’s stimulus package that time is running out.

Specifically, unless Congress extends the deadline — which I certainly wouldn’t count on — you must complete the purchase of the home by November 30th. That may sound like a good ways off. But when you consider that it can easily take two months to get through the entire home-buying process — find a house, make an accepted offer, pull together the money and documentation you’ll need for a mortgage, appraisal, title insurance and closing — anyone who hasn’t already begun will have to move quickly to squeeze under the November 30th wire.

That deadline aside, there are a few other criteria you’ll also have to meet before you can snag the tax credit.

To begin with, the home you’re buying must be your principal residence. And while $8,000 is the figure usually thrown around when talking about the credit, it’s actually equal to 10% of the purchase up to a maximum of $8,000.

You’ve also got to qualify as a first-time homebuyer. Clearly, you meet that hurdle if you or your spouse has never owned a home before. But you may still be eligible even if you’re not buying a home for the first time. Why? Because for the purposes of this program, you’re also considered a first-time buyer as long as you or your spouse hasn’t owned a principal residence within three years. Notice I said principal residence. Owning a vacation home or rental property doesn’t disqualify you.

Then there are the income eligibility rules. To get the full credit, your modified adjusted gross income can’t exceed $75,000 if you’re single or $150,000 if you’re married. You can claim a partial credit, however, as long as your income doesn’t exceed $95,000 if you’re single or $170,000 if you’re married.

Now, let’s get back to your query about payback rules. If you indeed qualified for the $8,000 first-time homebuyer credit for homes bought from January 1 through November 30, 2009, then you don’t have to worry about paying it back, provided you continue using the house as your principal residence for at least 36 months after buying. Sell it or stop using it as your principal residence within 36 months, however, and you’ll have to repay the entire amount of the credit as additional tax when you file your next tax return (although there are a few exceptions).

But the fact that you’re concerned about paying it back makes me wonder whether you have actually taken a different first-time homebuyer tax credit.

Before passing the $8,000 credit in the stimulus package this year, Congress had already enacted a $7,500 first-time homebuyer credit last year as part of the Housing and Economic Recovery Act of 2008. This $7,500 credit, which was designed to apply to houses bought by qualifying first-time buyers between April 9, 2008 and July 1, 2009, is actually an interest-free loan that must be repaid.

So if that’s the credit you actually got, then you must pay it back over 15 years through an additional tax starting with your 2010 tax return (although here too there are exceptions).

So the first thing you need to do is find out which tax credit you actually received. If you bought your house in 2008, then you got the $7,500 tax credit, and you will have to repay it. Sorry, but you can’t get the $8,000 credit if you bought in 2008.

You could, however, be part of what is likely a small group of first timers who bought their home early in 2009 before Congress enacted the $8,000 credit and who took the $7,500 credit. Someone might have done that because he filed his 2008 taxes before the $8,000 became available in 2009 or because he just didn’t know about the larger credit or perhaps just mistakenly believed that once he filed for the smaller credit he no longer could get the larger one.

But if you, or any other qualifying first-time buyer, bought a home in 2009 and received the $7,500 credit instead of the $8,000 one for whatever reason, you’re not stuck with the smaller amount. You can file an amended return for 2008, claim the $8,000 credit and get the extra $500.

That’s right, even though the $8,000 credit applies to a 2009 purchase, the IRS actually allows you to claim it on your 2008 taxes. Which, by the way, is also an important point for any first-timer who already bought this year or plans to buy before the Nov. 30 deadline to keep in mind. Once you complete the purchase, you don’t have to wait until you file your 2009 taxes next year to get your $8,000 credit. You can get it sooner by filing an amended 2008 return.

So to sum up, whether or not you’ll have to repay the credit depends on which credit you got and how long you live in the home.

As for anyone else who needs a house, has the financial wherewithal to buy one and is thinking about taking advantage of the $8,000 first-time homebuyer credit as a way to get it, you’d better get a move on.

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