Good News for 2008 Home Buyers
Posted on November 11, 2008 by Nancy Liu | Category: Real Estate
The Housing and Economic Recovery Act of 2008 gives a $7500 tax credit for the buyers who purchased their first house this year. This is good news for people who wanted to purchase a house, but were reluctant because of the economic crisis. So, who is qualified to enjoy this benefit?
All first-time home buyers who purchased their first house on or after April 9, 2008 and before July 1, 2009, and their income within a certain amount annually are eligible for this tax credit. The house can be a new home, resale home, or a new home you just built for yourself on the land you already own. It could be a single-family home, condo, or townhouse. However, the closing date of the house must be on or after April 9, 2008 and before July 1, 2009, not the contract date. In other words, if you signed the contract for the home on June 15, 2008 but would not close on the home until July 15, 2009, you are not eligible for the tax credit.
What is the definition of first-time home buyer? First-time home buyer is someone who did not own any principal residence in the past three years. For married couples, if the husband/wife owned a principal residence in the past three years and purchased your new residence after the marriage, you are not eligible for the tax credit.
Are all 2008-2009 first-time buyers qualified for the tax credit? No, the law limits the income of the home buyer, so the first-time home buyer’s adjusted gross income (AGI) has to be less than $75,000 for individuals, and less than $150,000 for joint incomes. If AGI is between $75,000 and $95,000 for individual and between $150,000 and $170,000 for joint, the tax credit will phase-out, so you might still qualify for some amount of tax credit. What is “adjusted gross income” (AGI)? AGI is the last number shown on the page 1 and the first number on page 2 of Form 1040 and 1040A; it is last year’s total income (including wage, interests, etc.) minus certain deductible expenses, but before subtraction on the itemized deduction (mortgage interest, or donation, etc) and personal exemptions.
What is favorable about the tax credit? Tax Credit will directly offset the taxes that you were entitled to pay. If you owe $7500 for 2008 personal income tax, purchased your first principal home this year, and your AGI is within the limits set by The Housing and Economic Recovery Act of 2008, the taxes you owed will be offset by the tax credit you receive; you don’t have to pay anything for 2008 personal income tax. The tax credit is generally 10% of the qualified home purchase price or $7500, whichever is less. If the purchase price of your first principal home is greater than $75,000, you will receive $7500 as your tax credit. If the purchase price is $69,000, then your tax credit would be $6900.
Tax credit is more valuable than tax deduction, because the tax can credit directly offset the tax amount owed, but the tax deduction provides less benefit for you. For instance, if your tax bracket is 15%, you owed $8000 for personal income tax, then a $7500 tax deduction will reduce your personal income tax by $1125 (15% x $7500), and you will still owe $6875 ($8000 – $1125) for your income tax. However, if you receive a $7500 tax credit, you will only owe $500 ($800 – $7500) since the tax credit will directly offset from your total tax owed.
Is this tax credit benefit yours forever? No, beneficiary will have to pay the $7500 tax credit back to the government in the next 15 years. The government will not collect interest on the tax credit you received, but you will start to repay $500 tax per year after you have lived in the home for two years. If you purchased the home in 2008, you will not have to start your $500 tax repay until 2010. If you sell the home, the remaining credit amount will be paid out of gross gain from the sale. If your gross gain from the sale does not cover the remaining credit amount, the remaining balance of the credit will be forgiven.
This article is only for your reference. Please do not apply mechanically to any exact cases. You are welcome to consult our attorneys at Liu & Associates, P.C. For contact information, please click here.