The Housing and Economic Recovery Act of 2008 provides a new refundable tax credit for individuals who are qualified first-time homebuyers of a principal residence in the United States. The provision applies to a principal residence purchased by the taxpayer on or after April 9, 2008, and before July 1, 2009. Homebuyers who qualify are allowed a one-time credit against their income tax for the year of purchase. Unlike some past credits, this one must be repaid over a 15-year period. As a result, the new tax credit works like an interest free loan. You take the full credit in either 2008 or 2009, and then repay the credit amount in equal payments over 15 years, with no interest charges.

EXTENDED AND EXPANED on November 8, 2009 - Home Buyer Tax Credit of 2010

New Legislation
New legislation, the Worker, Home ownership and Business Assistance Act of 2009, which was signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts. The new law:
      • Extends deadlines for purchasing and closing on a home.
      • Authorizes the credit for long-time homeowners buying a replacement principal residence.
      • Raises the income limitations for homeowners claiming the credit.

Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

For the first time, long-time homeowners who buy a replacement principal residence may also claim a homebuyer credit of up to $6,500 (up to $3,250 for a married individual filing separately). They must have lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased.

First-Time Homebuyer
A "first-time homebuyer" is any individual (and spouse if married) who had no present ownership interest in a qualifying principal residence during the 3-year period ending on the date of purchase of the principal residence for which a first-time homebuyer credit is being claimed.

Exceptions to definition of First-Time Homebuyer
The following taxpayers do not qualify for the first-time homebuyer credit:

• A homebuyer who qualifies for the District of Columbia First-time Homebuyer Credit in the year of purchase or in any prior year
• A homebuyer whose home was financed by the proceeds of tax-exempt mortgage revenue bonds
• A homebuyer who is a nonresident alien
• A homebuyer who disposes of the residence (or it ceases to be the taxpayer's principal residence) before the close of a taxable year for which a credit otherwise would be allowable

Rules for Active Military, Foreign Service & Intelligence Community
Congress acknowledged the unique circumstances affecting members of the military, the foreign service and the intelligence community by making the following exceptions that apply to both the $8,000 tax credit for first-time home buyers and the $6,500 tax credit for repeat home buyers. Those eligible may have extended benefits - click here.

Purchase Price
The term "purchase price" means the adjusted basis of the principal residence on the date such residence is purchased.

Initial Credit
The initial credit for qualified buyers is equal to 10% of the purchase price of the principal residence, but cannot exceed $7,500 ($3,750 for married individuals filing a separate return).

Modified Adjusted Gross Income Limit (MAGI)
The credit phases out for individuals with modified adjusted gross income (MAGI) between $75,000 and $95,000 ($150,000–$170,000 for joint filers) for the year of purchase. The credit is completely phased out for an individual with a MAGI equal to or more than $95,000 ($170,000 for joint filers).

To determine the allowable credit, subtract the limit threshold of $75,000 ($150,000 in the case of a joint return) from your MAGI. Divide the difference by $20,000 to get your reduction ratio. Multiply your initial credit by your reduction ratio to arrive at the credit reduction amount. Subtract the credit reduction amount from the initial credit to arrive at the allowable credit amount. Use Federal tax form 5404 to file - Form 5404

Example: Filing Status = Single, MAGI = $80,000, Purchase Price = $80,000, Initial Credit = $7,500 (limited to the lower of $8,000 (10% of Purchase Price) or $7,500)

Recapture of credit
If a first-time homebuyer credit is allowed to a taxpayer, the taxpayer's income tax is increased by 6 2/3% of the amount of such credit for each taxable year in the 15-year "recapture period." The recapture period begins with the second taxable year following the year of purchase for which the credit is taken.

For example, if a taxpayer is allowed a $7,500 first-time homebuyer credit in 2008, the taxpayer must recapture the credit amount by adding $500 (which is 6 2/3% of $7,500) to his income tax liability each year for 15 years, beginning in 2010.

Acceleration of recapture
If a taxpayer disposes of the principal residence for which a first-time homebuyers credit was allowed (or ceases using it as a principal residence) before the end of the 15-year recapture period, the remaining credit repayment amount is added to the income tax liability of the taxpayer for the year of sale or cessation of use.

Exceptions to recapture
In the case of a sale of the principal residence to an unrelated person, the increase in tax due to accelerated recapture is limited to the amount of gain (if any) on such sale. For purposes of calculating gain, the adjusted basis of such residence shall be reduced by the amount of the first-time homebuyer credit allowed, to the extent not previously recaptured. In the case of an involuntary conversion, recapture is not accelerated if a new principal residence is acquired within a 2-year period. No amount is recaptured after the death of the taxpayer.

Special election to treat purchase as made in prior year.
In the case of a purchase of a principal residence after December 31, 2008, and before July 1, 2009, a taxpayer may elect to treat such purchase as made on December 31, 2008.

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