President Obama signed an extension on November 6, 2009 as part of a $24 billion economic stimulus bill. The extension is through April 30, 2010, with a 60-day extension to June 30, 2010 for those who enter into a contract by April 30th. It also includes a smaller credit for home buyers who already own a home, providing those buyers have lived in their present home for 5 years out of the last 8 years.
The Difference Between a Tax Credit and a Tax Deduction
A tax credit is applied directly to taxes owed. If you owe $8,500 in taxes and apply the $8,000 tax credit, your tax bill is reduced to $500. If you have already paid $9,000 through payroll deductions or estimated tax payments, you will get a refund of $8,500.
A tax deduction is a reduction against earned income. If you made $100,000, an 8,000 tax deduction would simply reduce that income for tax purposes to $92,000, and you would pay taxes on that lower income.
How Does the $8,000 Home Buyer Tax Credit Work?
Qualified home buyers can receive a true tax credit of 10% of the purchase price, with a maximum credit amount of $8,000. This means if you buy a home for $80,000 or more, you can deduct the full $8,000 tax credit from the amount owed to the I.R.S. If you usually get a refund on your taxes -- and you qualify for the maximum tax credit -- you can add another $8,000 to that refund for 2009.
You can also amend your 2008 return and take the deduction in 2008, if you closed on a home before November 6, 2009.
Qualifications for the $8,000 Home Buyer Tax Credit
Only first-time home buyers are eligible for the $8,000 tax credit. This is defined as not owning a home over the past 3 years. Here are other qualifications:
- The home must be your principal residence.
- Only homes purchased on or after January 1, 2009 and before June 30, 2010 qualify for the tax credit.
- Limited to individuals with adjusted gross incomes of $75,000 as a single person or $150,000 filing jointly for those who have closed by November 5, 2009. There is a phase-out for single incomes between $75,000 and $95,000, and for couples filing jointly with incomes between $150,000 and $170,000. For first-time home buyers who buy a home between November 6, 2009 and April 30, 2010, the extension signed by Obama raises the income levels to $125,000 as a single person or $225,000 for couples.
More About the $8,000 Home Buyer Tax Credit
- Unlike the 2008 $7,500 home buyer tax credit, the $8,000 first-time home buyer tax credit is not a loan and does not need to be repaid. It's like free money for buying a house during the specified time period and meeting certain requirements.
- Also, unlike the 2008 $7,500 home buyer tax credit, you can use the credit if you financed your home purchase with state or local bond funding.
- However, if you sell that home within the first 3 years of ownership, the entire amount of the tax credit is recaptured. This means you will be required to give that money back to the I.R.S. So, if you take advantage of the tax credit, plan to stay put for 3 years.
About the $6,500 Home Buyer Tax Credit
The extension signed by President Obama gives a $6,500 tax credit to home buyers who are not first-time home buyers. The qualification is a buyer must have owned a home as a primary residence and lived in that home for 5 of the last 8 years. This home buyer tax credit applies to homes purchased between November 6, 2009 and April 30, 2010, providing the sale closes by June 30, 2010.
As with the $8,000 first-time home buyer tax credit, a buyer who qualifies for the $6,500 home buyer tax credit must live in the new home for 3 years or repay the tax credit.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.