Recently, Congress approved legislation that will extend the first-time home buyer tax credit beyond its November 30 deadline and expand it to a wider group of home buyers. Also included in the bill is tax relief for businesses with net operating losses (NOLs).
Who is Eligible
First-time home buyers, who are defined by the law as buyers who have not owned a principal residence during the three-year period prior to the purchase, may be eligible for a tax credit of 10% of the home purchase price, up to a maximum of $8,000.
In addition to first-time home buyers, the bill also provides a tax credit to existing home owners who have been residing in their principal residence for five consecutive years out of the last eight and are purchasing a home to be their principal residence ("repeat buyer"). Repeat buyers may be eligible for a tax credit of 10% of the home purchase price, up to a maximum of $6,500.
Income Limits
The income eligibility limits to claim the full credit amount for both groups of home buyers have been raised from $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return to $125,000 for individuals and $225,000 for married couples. More specifically, home buyers who file as single or head-of-household taxpayers can claim the full credit ($8,000 for first-time buyers and $6,500 for repeat buyers) if their modified adjusted gross income (MAGI) is less than $125,000 and the combined income limit is $225,000 for married couples filing a joint return.
Single or head-of-household taxpayers who earn between $125,000 and $145,000, and married couples who earn between $225,000 and $245,000 are eligible to receive a partial credit. The credit is not available for single taxpayers whose MAGI is greater than $145,000 and married couples with a MAGI that exceeds $245,000.
Effective Dates
The eligibility period for the tax credit is for homes purchased after November 6, 2009, and before April 30, 2010. However, home purchases subject to a binding sales contract signed by April 30, 2010, will qualify for the tax credit provided closing occurs prior to June 30, 2010.
Types of Homes that Qualify
All homes with a purchase price of less than $800,000 qualify, including newly constructed or resale, and single-family detached, townhomes or condominiums, provided that the home will be used as their principal residence. Vacation homes and rental property purchases do NOT qualify.
Tax Credit is Refundable
A refundable credit means that if the amount of income taxes you owe is less than the credit amount you qualify for, the government will send you a check for the difference.
For example: A first-time buyer who qualifies for the full $8,000 credit who owes $5,000 in federal income taxes would pay nothing to the IRS and receive a $3,000 payment from the government. If you are due to receive a $1,000 refund, you would receive $9,000 ($1,000 plus the $8,000 tax credit). A repeat buyer who owes $5,000 would pay nothing to the IRS and receive $1,500 back from the government. If you are due to get a $1,000 refund, you would get $7,500 ($1,000 plus the $6,500 tax credit).
All qualified home buyers can take the tax credit on their 2009 or 2010 income tax return.
Payback Provisions
The tax credit is a true credit. It does not have to be repaid unless the home owner sells or stops using the home as his or her principal residence within three years after the purchase.
Net Operating Losses
In addition to the tax credits offered to home buyers, the new legislation will allow all businesses -- regardless of size -- with operating losses in 2008 or 2009, not both, to claim refunds on taxes paid up to five years ago. Businesses can offset 100% of taxable income with NOLs carried back in years one through four and offset 50% of income in year five. Small businesses with less than $15 million in gross receipts would be able to claim a five-year carryback for 2008 losses under the American Recovery and Reinvestment Act and for 2009 losses under the new law.
