First-Time Home Buyer Tax Credit: Questions and Answers

There is no doubt that timing is of the essence if a prospective homeowner is looking to benefit from the first-time home buyer tax credit. With the deadline looming to have a purchase agreement signed by April 30 and the closing completed by June 30, if the ball is not moving yet, it will have to get moving rather quickly. If you’re on the fence, or simply need a better understanding of the $8,000 first-time home buyer tax credit, below are the more common questions that prospective home buyers have been asking.

What is the definition of a first-time home buyer?
The definition of a first-time home buyer is a buyer who has not owned an interest in a primary residence in the past three years. The timeline is based on the closing date. Therefore, if a borrower has not owned an interest in a primary residence since April 4, 2007, the buyer will be considered a first-time home buyer again on April 4, 2010. Using this scenario, the home buyer can begin the purchase process prior to April 4, 2010, but cannot close before that date without forfeiting the benefit of the $8,000 first-time home buyer tax credit.

If a married couple is purchasing a home and one of the spouses has owned an interest in a primary residence in the past three years, both partners are ineligible for the first-time home buyer tax credit. Ownership of a second home or investment property does no exclude a buyer from benefiting from the first-time home buyer tax credit.

What type of home can be used to qualify for the first-time home buyer tax credit?
Regardless of the number of units in the home, as long as the buyer uses the property as a primary residence, they are eligible for the first time home buyer tax credit. A primary residence can be a single-family detached home, or an attached home such as a condominium, townhouse, manufactured home (mobile home) or houseboat.

Buyers are not eligible for the first-time home buyer tax credit if the primary residence is part of a non-arms length transaction. A non-arms length transaction is one that involves a seller and a buyer who are related.

Who is eligible for the first-time home buyer tax credit?
As long as a buyer is considered a first-time home buyer (see definition above), they are eligible for the first-time home buyer tax credit. The regulations regarding the first-time home buyer tax credit indicate the purchase transaction must occur no earlier than January 1, 2009 and no later than June 30, 2010. Also, a purchase agreement must be signed no later than April 30, 2010 in order to qualify for the first time home buyer tax credit.

What documentation is required to claim the first-time home buyer tax credit?
In order to claim the first time home buyer tax credit, IRS Form 5405 must be completed when filing your income tax returns. If you’ve already filed your tax returns, but have not yet closed on your new home, you can simply amend your 2009 returns to claim the first-time home buyer tax credit. Buyers cannot claim the first time home buyer tax credit on an intended purchase. The purchase must be completed in order to claim the credit. A copy of the HUD-1 settlement form must accompany the IRS From 5405 as proof the home purchase has been completed.

Can a home buyer access the tax credit sooner than having to wait to file their tax returns?
If a prospective home buyer believes he/she qualifies for the first-time home buyer tax credit, then yes, he/she is permitted to reduce their income tax withholding. This will enable the home buyer to accumulate cash by increasing take home pay. The money can then be used to put toward the down payment.  However, because the purchase agreement must be signed by April 30, 2010 and the closing completed by June 30, 2010, it is more than likely too late in the process to accumulate enough money through reducing income tax withholdings to make a significant difference.

Potential home buyers who adjust their withholdings on their W-4 in an attempt to accumulate a down payment should note that if the purchase of the home does not occur, repayment of the additional withholdings, plus potential interest charges and penalties, may be assessed. It is highly recommended that home buyers discuss this option with an accountant prior to implementing this course of action.

If I bought my first home in 2008, do I still qualify for the first-time home buyer tax credit?
Unfortunately, you cannot benefit from this first-time home buyer tax credit. However, all is not lost. If you purchased your first home between April 9, 208 and January 1, 2009, there is a separate tax credit that you may be eligible for.  Contact a tax advisor for more information.

Will the first-time home buyer tax credit be extended again?
Although it is very unlikely, there are rumors that President Obama is considering extending the first-time home buyer tax credit for a second time. The popular tax credit has certainly helped rejuvenate the housing industry, and another extension would only solidify further growth. If current mortgage rates can remain at or near historic lows, the better the likelihood of another extension to the first time home buyer tax credit.

Robert Hyder