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By: Ikedi Ani-okoye
Have you been asked by your clients about the First Time Home Buyer Tax Credit? As a mortgage professional, you can build trust and loyalty with your clients if you have a basic understanding of the credit and how it can impact their decisions whenever applying for a loan.
Use it as a dealing tool to talk with your clients who are thinking about buying a home (first time home buyers) and will working with you for the loan. Use it as a reason to call clients you haven't talked with to give them info. It can also be a great way to introduce you to real estate agents who deal with first time home buyers.
Surprisingly, many first time home buyers have never heard of the tax credit, or they misunderstand how it works. The most common misconception is that it can be used toward their down payment. This is NOT correct. It is a TAX CREDIT that can be claimed on a 2008 tax return (filed through April 15, 2009), an amended 2008 tax return, or on a 2009 tax return.
The 2009 Tax Credit
The First Time Home Buyer Tax Credit was originally passed through Congress in 2008. It was a $7,500 tax credit that went into effect on April 8, 2008 and expired on July 1, 2009. The heavy negative was that it had to be REPAID over a 15 year period, so basically it was a loan - not a credit.
The adept news is that in February 2009, Congress increased the tax credit to $8,000 (or up to 10% of the buy price, so when the purchase cost is $78,000, the credit is $7,800.) and removed the repayment requirement. It is for homes purchased and closed from January 1, 2009 to November 30, 2009. For homes purchased in 2008, the tax credit still must be repaid.
How it work?
To realize just how beneficial this can be, you need to interpret how a tax credit works. Basically, every dollar of a tax credit reduces the income tax through a dollar. Once a qualified purchaser has calculated his/her total tax due (after deductions, exemptions, etc), tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 - $8000 = $1500).
Great incentive to get first time home buyers off the fence and get pre-approved for a loan!
Does your client require applying for the tax credit?
There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.
Is there an income restriction?
Yes. The income restriction is based on the tax filing condition the purchaser claims when filing their income tax return. souls filing Form 1040 as Single (or Head of Household) are eligible for the credit when their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.
That being said, singles and couples who make more may still receive a partial credit, as there is a "phase out" range. For singles, the credit phases out between $75,000 - $95,000. For married filing jointly, the credit phases out between $150,000 - $170,000. This means that singles who make over $75,000 and couples who make over $150,000, the credit is proportionately reduced as income approaches $95,000 and $170,000 respectively.
For example, whenever a couple makes $165,000, the extra amount is used to create a fraction 15,000/20,000 (.75) times the credit amount. 75% or $6,000 of the credit would be disallowed. They would still get a $2,000 credit.
Who Qualifies as a First Time Home Buyer?
A first time home buyer is someone who has not owned a home any time during the 3 years prior to the date of buy. For married joint filers, both must meet the first time home buyer test to take the credit on a joint return.
The house being purchased must be owner occupied and it must be located in the United States. It is very significant to note there is a 3 year residency rule, which means if the house is sold prior to 3 years of ownership; the tax credit must be repaid.
NAR (National association of Realtors) has estimated that hundreds of thousands of new buyers could enter the market due to the First Time Home Buyer Tax Credit. Just imagine what that would do for your business! For more details and updated specifics of the tax credit, you should always advise your clients to talk with a tax expert or CPA.
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