FAQs on the $8,000 Home Buyer’s Incentive or Tax Credit

Hannah Kotsala 3-31-2009

Jake and Samantha are set to get married this summer. The only item left on their to-do list is to purchase that dream home to call their own. This way when Jake carries Samantha over the threshold it will be in a home that is truly theirs. They want to take advantage of the tax credit they've been hearing about. However, Jake and Samantha have heard so many stories about the tax credit that they aren’t sure how to separate fact from fiction.

If you are like Jake and Samantha in that you have questions about the tax credit read on…

Q: I hear the tax credit is only for first time home buyers. What exactly is a first time home buyer?

^{A: A first time home buyer is someone who has not owned a home as your principal residence in the past 3 years.}

^{Q: My friends bought a vacation home in Hawaii last year. Does that count as their 2008 tax credit?}

^{A: No. Last year’s tax credit applies to purchase of principal residences as well. If they’ve owned a "vacation home" they would still qualify for this year’s 2009 tax credit if they purchased a principal residence between January 1, 2009 and December 1, 2009.}

^{Q: I am interested in buying a condo for about $70,000. Is it true that I won’t qualify for the $8000 credit?}

^{A: Actually, you will still qualify for a credit. You get 10% of the cost of your home or $8,000, whichever is less. In your case, you would get a credit of $7,000.}

Q: Does the credit need to be repaid like last year’s?

A: No, unless you sell your home within 3 years of purchase. Then the entire amount of credit is recaptured on sale.

Q: What is the effect of the credit on my tax return?

A: Here are 2 examples:
Example #1 — If you overpaid Uncle Sam on your payroll withholdings and expect to receive a refund of $1,000 you will actually receive $9,000. $1,000 + $8,000 = $9,000.
Example #2 — If you underpaid Uncle Sam and expect to write a check to the IRS for $1,000 then you will receive $7,000. $8,000 - $1,000 = $7,000.

Q: Do only low income families qualify?

A: There are some income limitations but it’s not only for low income families. Married couples must have a modified adjusted gross income (MAGI) of $150,000 or $75,000 for a single person. Higher income buyers may receive a partial tax credit but the tax credit is completely eliminated when your MAGI reaches $95,000 or $170,000 for married couples.

Q: How do I apply?

A: Simply fill out form IRS Form 5405 http://www.irs.gov/pub/irs-pdf/f5405.pdf to find out the amount of your credit and enter it on line 69 of Form 1040.