Start house-hunting now to qualify for tax credit for first-time home buyers

First-time home buyers had better get a move on if they hope to take advantage of the $8,000 federal tax credit.
By: Lew Sichelman: latimes.com
The window of opportunity is closing rapidly.

To qualify for the credit, any transaction involving a first-time buyer must close before midnight Nov. 30, when the valuable tax benefit expires. And because the buying and lending processes can be slow, you're going to need every bit of that time to close escrow.

Although the end of November might seem a long way off, Diane Dilzell, president of the New Jersey Assn. of Realtors, rightly points out that it takes weeks, if not months, to manage the logistics involved in a real estate transaction. It's also important to realize that any of a number of things can go haywire along the way.

"Unique circumstances can be encountered in any transaction, so it is important to account for those factors," said Dilzell, a broker at Pinnacle Realtors in Bedminster, N.J. "Since numerous third parties are involved, delays can be expected no matter how swiftly you act."

Another complicating factor: closed offices during the Thanksgiving holiday. With Thanksgiving this year falling on Nov. 26, that removes four days right before the deadline.

Undoubtedly, some escrow agents will scrap vacation plans to handle what is expected to be a crush of settlements. But that highlights yet another potential pitfall: There may be so many buyers trying to close at the last minute that there might not be enough room for them all.

Moreover, if you're banking on Congress to extend the tax credit or possibly even expand it, the odds are against you, at least right now.

Even though there's always a chance that lawmakers will do the unexpected, House and Senate leaders have said they will not take up any expiring provisions until they have completed work on healthcare-reform legislation. Moreover, with many signs indicating that the moribund market is starting to awaken, many legislators might decide that housing no longer needs a shot in the arm.

And don't expect to sneak a Dec. 1 closing past the Internal Revenue Service either. That's fraud, and the nation's tax collector has any number of sophisticated screening tools to quickly identify returns that may contain fraudulent claims.

What's more, the IRS has vowed to go after taxpayers who try to pull a fast one. "We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction," says Eileen Mayer, the agency's chief criminal investigator.

Buyers with specific questions about the tax credit should consult with a qualified tax advisor. But here's a brief rundown of the rules.

A first-timer is defined as anyone who has not owned a principal residence during the three years immediately before the purchase. The house doesn't qualify for the credit, though, if the buyer sells it before the end of the year.

Vacation homes and investment properties do not qualify; only main residences, new or resale, which can be a single-family house, town house, condominium, manufactured (or mobile) home or even a houseboat. If you hire a contractor to build the house rather than buy from a builder, the house is still treated as having been purchased.

Purchases must be arm's-length transactions. The seller cannot be a parent, grandparent, child, grandchild or spouse. Legal residents who file U.S. tax returns qualify for the credit, but those who are undocumented immigrants or nonresidents do not.

Married people filing as such cannot claim the credit if either spouse has owned a main residence within the last three years, but unmarried joint purchasers - say, a parent and his son - may allocate the credit in any way they see fit as long as it does not exceed the $8,000 maximum.

Speaking of maximum, the tax credit is equal to 10% of the purchase price up to $8,000. But there are income limits. For single taxpayers, the ceiling is $75,000; for married taxpayers filing jointly, it is $150,000. For those with modified adjusted gross incomes above those limits, the tax credit is reduced on a sliding-scale basis to zero when the income exceeds $95,000 for single payers and $170,000 for married payers.

To assist would-be buyers who need help with down-payment and closing costs, the government will allow those who finance their purchases with a federally insured loan to apply their anticipated credit immediately toward the transaction rather than waiting until they file their 2009 taxes to receive a refund.

Under guidelines announced by the Federal Housing Administration, nonprofits and FHA-approved lenders are permitted to make short-term loans to qualified borrowers in the amount they would otherwise receive as a refund.

The law permits taxpayers to treat purchases that take place this year as though they occurred on Dec. 31, 2008. You can apply the tax credit against your 2008 return if that will bring you the largest credit amount (depending on your modified adjusted gross income). To do so, you must file an amended return for 2008.