6 keys to first-time homebuyer tax credit

Most people welcome any extra cash when buying a home. And, thanks to a government tax credit of up to $8,000 for first-time homebuyers and up to $6,500 for move-up buyers, they're getting it
By:Tracey C. Velt: Bankrate.com
But, you have to act quickly. The tax credit applies to a principal residence bought by April 30, 2010, and you must close by June 30, 2010.
However, there are many misconceptions about who qualifies and for how much. Here are six essential facts about the tax credit.

1. In some cases, you can use it as a down payment or for closing costs. For the most part, homebuyers can't use the tax credit as an automatic down payment, although "tax credit funds can be used for the basic down-payment requirement (3.5 percent) on an FHA-insured loan only when it's handled through a state housing finance agency (HFA)," says Lemar Wooley, a spokesman for the U.S. Department of Housing and Urban Development.

If the home loan is handled through an FHA lender (and not an HFA), the tax credit can be "used to add to the down payment above the 3.5 percent required amount. It can also be used for closing costs," says Wooley.

Many state HFAs are running or sponsoring programs that will use a tax credit for a down payment. These programs often place a second lien on the home as collateral to secure the eventual repayment of the tax credit funds. Some HFAs lend directly to homebuyers while others work through networks of state-approved lenders. For a list of what state HFAs are doing, go to www.ncsha.org.

2. You don't get a check at closing. Many homebuyers assume that the $8,000 is given to them at closing. Not true, says Winter Park, Fla.-based accountant David Keeler.

"Taxpayers need to wait until they've actually filed their income tax return to receive the tax credit," says Keeler. "The homebuyer credit reduces one's tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund."

The IRS says first-time homebuyers who purchased a home in 2009 can claim the tax credit on either a 2008 return, due April 15, 2009, or a 2009 return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting a filing extension or by filing an amended return.

3. You don't always get the full credit. "This is one of the biggest misconceptions out there," says Maynor Perez, a real estate sales associate with Positive Realty in Doral, Fla. "If you pay $50,000 for a home, you will not get the full $8,000 tax credit."

In fact, the top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10 percent of the residence's purchase price - whichever is less. So, for a $50,000 home, the homebuyer would receive a $5,000 tax credit. And, if you buy a house for $800,000 or more, you're not eligible for the tax credit.

4. You may have to pay it back. Taxpayers who claim the credit must use the home as a principal residence for the next three consecutive years. If you sell the house before living in it for three years, you may have to pay back the tax credit.

Who doesn't have to pay back the tax credit? Qualified military service members who sell or move from a tax credit home within three years of the initial purchase, due to official extended duty, are exempt from paying back the money, says Lisa Ellis, sales manager of Century 21 Prestige Real Estate Inc. in St. Robert, Mo.

"Members of the military don't have control over how long they stay in one place. At Fort Leonard Wood, the typical military member stays only two to three years," says Ellis.

5. You don't have to be a first-time homebuyer. A first-time homebuyer is defined as someone who hasn't owned a principal residence in the past three years. If you have owned a home before but haven't owned one recently, you may still qualify for the full $8,000.

If you currently own a home, the tax credit was recently amended to include move-up buyers. As a move-up buyer, you may qualify for up to $6,500. Vacation homes and rental properties are not eligible.

6. There are income limits. "The homebuyer credit is available to higher income taxpayers," says Keeler. "For purchases after Nov. 6, 2009, the homebuyer credit phases out over higher modified adjusted gross income levels, making the credit available to a much bigger pool of buyers."

For homes purchased after Nov. 6, 2009, and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

The tax credit expansion can give you incentive to start looking. But, act quickly and carefully to ensure you receive the full benefit.