THE NEW HOME PURCHASE TAX CREDIT EXPLAINED

With the extension of the first time homebuyer tax credit and the addition of a tax credit for existing homeowners there have been changes that need to be noted. Please find compiled the most important facts associated with the new laws. You will find below a break down of both the $8,000 first time homebuyer tax credit and the $6,500 existing homebuyer tax credit.

$8,000 First Time Homebuyer Tax Credit

The income limits have changed. In order to receive the full tax credit amount, the income limit for a single person is $125,000 and a married couple is $225,000. They can earn more than that but the amount received will be phased out to a maximum income of $145,000 for a single person and $245,000 for a married couple. In addition, no tax credit is available if the cost of the home exceeds $800,000. The buyer may not acquire the property from any relative on either side of the family.

The same restriction applies as before which is they cannot have owned a home in the last three years and they must continue to live in the new house for 3 years or it will be required to pay the credit back. The buyer must enter into a binding contract to purchase by April 30, 2010 and close no later than July 1, 2010. In order to receive the tax credit the buyer must file his or her federal tax return with the Internal Revenue Service along with the HUD-1 and IRS Form 5405. As an example, if the first time buyer owes the government $5,000 in tax, they will receive a $3,000 check from the Internal Revenue Service, not the entire $8,000.

$6,500 Existing Homebuyer Credit

To qualify the buyer must have owned and lived in a home for at least five of the last eight years. The existing home may have already sold and not been replaced in the last year or two. The home purchased must be the primary residence and the existing home may become a rental property or second home. The new purchase does not have to cost more than the existing one.

If the existing home is sold, taxable profits from the sale will be added to the buyer’s other earnings to determine if the adjusted gross income exceeds the allowable thresholds. Remember, some profits from the sale of the existing home do not count as income. Taxpayers are allowed to exclude $250,000 per person or $500,000 per couple if they lived in the home two of the last five years. The $6,500 tax credit also phases out for singles earning more than $125,000 and couples earning more than $225,000. Always consult a professional tax advisor for tax advice.