Helen's Blog

Tax Credits -- The Basics

Frequently Asked Questions

In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first-time homebuyers to purchase a home.  The credit was designed as a mechanism to decrease the over-supply of homes for sale. 

For 2009, Congress has increased the credit to $8000 and made several additional improvements.  This revised $8000 tax credit applies to purchases on or after January 1, 2009 and before December 1, 2009. 

The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers.  Any home that is purchased for $80,000 or more qualifies for the full $8000 amount.  If the house costs less than $80,000, the credit will be 10% of the cost.  Thus, if an individual purchased a home for $75,000, the credit would be $7500.    It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. 

 Who is eligible?

Only first-time homebuyers are eligible.  A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

 How does a tax credit work?

Every dollar of a tax credit reduces income taxes by a dollar.  Credits are claimed on an individual’s income tax return.  Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due.  Then, once the total tax owed has been computed, 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)

 So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?

This tax credit is what’s called “refundable” credit.  Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000.  The refundable amount is the difference between $8000 credit amount and the amount of tax liability.  ($8000 - $6000 = $2000)  Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.  

Yes.  The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return.  Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000.  Married couples who file a Joint return may have income of no more than $150,000. 

 What’s the definition of “principal residence?”

Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%).  It is also defined as “owner-occupied” housing.  The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling.  Even some houseboats or manufactured homes count as principal residences. 

 Are there restrictions on the location of the property?

Yes.  The home must be located in the United States.   Property located outside the US is not eligible for the credit.

Are there restrictions related to the financing for the mortgage on the property?

In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit.  Congress eliminated the financing restriction that applied in 2008.  (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.)  Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser.  (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency.  Proceeds from the bonds must be used for below market loans to qualified buyers.)

Do I have to repay the 2009 tax credit? 

NO.   There is no repayment for 2009 tax credits. 

 Do 2008 purchasers still have to repay their tax credit?

YES.  The $7500 credit in 2008 was more like an interest-free loan.  All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return. 

> How do I apply for the 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.

>So I can’t use the credit amount as part of my downpayment?

No.  Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction. 

So there’s no way to get any cash flow benefits before I file my tax return?

Yes, there is.  Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments.  Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer.  In many cases their withholding would decrease and their take-home pay would increase.  Those who make estimated tax payments would make similar adjustments.

Some “Real World” Examples

>What if I purchase later this year but can’t get to settlement before December 1?

The credit is available for purchases before December 1, 2009.  A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser.  Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.

You’ll have a helpful choice that might speed up the process.  Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008.  Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009.  They actually have three filing options. 

If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15.

They can extend their 2008 income-tax filing until as late as October 15, 2009.  (The IRS grants automatic extensions, but the taxpayer must file for the extension.  See www.irs.gov for instructions on how to obtain an extension.)

If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X.  (Form 1040X is available at www.irs.gov) 

Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return.  Their 2009 tax return is due on April 15, 2010.

I purchased my home in early 2009 before the stimulus bill was enacted.  I claimed a $7500 tax credit on my 2008 return as prior law had permitted.  Am I restricted to just a $7500 credit?

No, you would qualify for the $8000 credit.  Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year.   This amended return will enable them to obtain the additional $500 credit amount.

 If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?

No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.

 I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return.  My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in.   Will he qualify for the $8000 credit, as well?

No.  Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit.  Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time homebuyer. 

No; double dipping is not allowed.  You would be eligible for only the $8000 credit.  This will be an advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.

One situation does require a recapture payment back to the government.  If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it.  A few exceptions apply.   (See below, #24).  Note that this same 3-year recapture rule applies, as well, to the $7500 credit available for 2008.  This provision is designed as an anti-flipping rule.

The repayment rules are eased for many circumstances.  If the homeowner who used the credit dies within the first three years of ownership, there is no recapture.  Special rules make adjustments for people who sell homes as part of a divorce settlement, as well.  Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.

WITHHOLDING EXAMPLES: 

Situation 1:  Sally plans her withholding so that her withholding is as close as possible to what she anticipates as her income tax liability for the year.  When she fills out her 1040, her liability is $6000.  She has had $6000 withheld from her paycheck.  She also qualifies for the $8000 homebuyer credit. 

Result:  Sally’s withholding satisfies her tax liability and reduces it to zero.  She will receive a refund of the full $8000.

Situation 2:  Nick and Nora file a joint return.  Nick is self-employed and makes estimated payments; Nora has taxes withheld from her salary.  When they compute their taxes, their combined withholding and estimated tax payments are $11,000.  Their income tax liability is $9800.  They also qualified as first-time homebuyers and are eligible for the $8000 refundable tax credit. 

Result:  Ordinarily, their combined estimated tax payments and withholding would make them eligible for a refund of $1200 ($11,000 - $9800 = $1200).  Because they are eligible for the refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund + $8000 refundable tax credit = $9200)

Situation 3:  Cesar and LuzMaria both have income taxes withheld from their salaries and file a joint return.  When they file their income tax return, their combined withholding is $5000.  However, their total tax liability is $7200, generating an additional income tax liability of $2200 ($7200 - $5000).  They also qualify for the $8000 first-time homebuyer tax credit.

>

Result:  Cesar and LuzMaria have been under-withheld by $2200.  Ordinarily, they would be required to pay the additional $2200 they owe (plus any applicable interest and penalties).  Because they are eligible for the refundable homebuyer tax credit, the credit will cover the $2200 additional liability.  In addition, they will receive an income tax refund of $5800 ($8000 - $2200 = $5800).  If they owed penalties and/or interest, that amount would reduce the refund.

Yes that right ladies and gentlemen. Texas Ranger Walker has just announced our newest member to the Homes for Heroes family. Caleb Shaw.

Caleb Shaw

Caleb Shaw is a Native Texan, with TEXAS size ambitions. After graduating from Agua Dulce as an accomplished student and state qualifying athlete, Caleb moved to Victoria where he was recruited to work at JR’s Boot Center. He quickly became a favorite among customers even though he was easily spotted as the only “non-western” employee there. Despite the fact that he loved his job and Victoria, he felt a sense of service, so he joined the United States Air Force. In just seven short years he was able to soar through the ranks, earn honor graduate out of basic training, and earn the top graduate award for nearly every military school he was sent to, including the coveted top spot for Airman Leadership School. He flew on the E-3 Sentry AWACS as an airborne radar technician for four years before cross training into three years of success in military law..

After the military, he worked for three years at Sendero Power Line Construction, Inc. Caleb’s intuitive thinking and work ethic took an already great company to new levels of excellence. Caleb also earned a bachelor’s degree graduating magna cum laude, and two associate degrees. Despite his success and enjoyment, Caleb missed his roots, sales and customer interaction.

Caleb is now a full time member of Redding & Associates, and couldn’t be happier. Caleb brings a passion and excitement that is second to none. Using tomorrow’s technology combined with old fashioned values, Caleb’s goal is to meet the current needs of all his customers and clients. Customer satisfaction is the foundation upon which Redding & Associates was founded, and Caleb strives to help build upon that. Caleb’s customers can reach him at all times, as an unrivaled work ethic insures he will do everything possible to make sure all transactions flow smoothly, efficiently, quickly, and most importantly….ENJOYABLY. Most people have forgotten that buying their first new home is supposed to be an exciting time, and if that went sour, the thought of doing it over again can be downright depressing, Caleb intends to change that perception, one satisfied customer at a time. Care, loyalty, integrity, confidentiality…just a few of the things any client deserves, but with Caleb Shaw will undoubtedly enjoy.

Caleb is a member of the Victoria Board of Realtors, the Texas Association of Realtors, and the National Association of Realtors. Additionally, Caleb is one of only five Victoria, TX Realtors to have earned the Texas Affordable Housing Specialist award, signifying his desire to help more Texans achieve their dreams of homeownership.

Recently Caleb decided to join the Homes for Heroes organization. By becoming an affiliate of this program Caleb is able to bring the excellent benefits to Victoria County Heroes. As a veteran, Caleb knows firsthand the sacrifices made by heroes in all the different career fields. Having two brothers that also served in the military, as well as a Texas Ranger for a father, Caleb is extremely excited to give back to our heroes, and make the pride of home ownership a reality!

So if you live around Victoria Texas and are looking for TEXAS size Service and savings, you can contact Caleb by visiting the Homes for Heroes website.

Want to be part of the Homes for Heroes family? Contact Helen or Ruth at 1-866-443-7637 with any questions or visit our web site at Homes for Heroes. This is a wonderful program helping our Heroes that do so much for our communities.

 You may want to forward this to your buyers who are holding off for lower rates because the media has led them to believe rates will continue to fall.  There is plenty of economic data that suggests that rates may increase.  To summarize the article below, either the plan works, capital spending increases (which is inflationary) and rates increase, or the plan fails and the government has to print more money or borrow more money which would also lead to higher rates. 

No time like the present to act now.

The economic stimulus package, a $787 billion assortment of tax breaks and government spending, is designed to re-ignite the engines of economic growth in the United States.

While the impact may not be immediate, this event will likely mark the beginning of the end of the dramatic move to lower mortgage interest rates that began in August of last year.  I am not suggesting that mortgage interest rates will soon begin touching double digit levels – but I do want you to be aware that the prospects of a 4.50% 30-year fixed-rate mortgage is rapidly fading from sight.

Consider the following two scenarios:  1) If the Obama administration’s stimulus package works as advertised economic growth will begin to accelerate sooner rather than later, driving up the demand for capital -- which in-turn will push-up interest rates of every description (including mortgage interest rates).  2) On the other hand, should the package fall woefully short of providing the necessary financial stimulus to grease the gears of the economy the government will be forced to borrow more money – or print more money – or create some kind of blend of these two revenue generating activities.  In any case – returning to the credit markets to borrow massive amounts of additional capital (beyond the gargantuan sums already outstanding) and/or simply printing up enormous piles of new dollars will do nothing but put more upward pressure on mortgage interest rates.

As in the case with prospective homeowners – there is a limit to the amount of outstanding debt they can have in place beyond which lenders will either demand significantly higher interest rates because of the increased risk of default – or if the lender deems the risk of default to be too large -- the loan request will simply be rejected.  While Uncle Sam currently enjoys a reputation as the most creditworthy governmental borrower in the world – there is a point where his sovereign credit score will begin to degenerate significantly and with it his ability to easily access relatively cheap amounts of capital.    

Should the government chose to simply print cash instead -- each dollar that runs off of the government printing presses will directly reduce the value of each dollar you have in your billfold or purse.  As this erosion of the value of the dollar continues suppliers of goods and servicers will find it necessary to increase their prices to offset the declining purchasing power of each dollar in revenue they generate.  As you probably already know, Superman lost all his strength when exposed to kryptonite, and so it is with mortgage investors when they are exposed to rising levels of inflation.  As inflation pressures rise -- so do mortgage interest rates.

As I mentioned earlier in this commentary I am not suggesting mortgage interest rates will soon begin touching double digit levels – but I do want you to be aware the prospects for a conforming 4.50% 30-year fixed-rate mortgage being a common sight on investor rate sheets is rapidly fading from the realm of realistic expectations.         

THE MARKET IS ALWAYS RIGHT! … YOU AND I ARE SOME OF THE TIME

We all know that Homes for Heroes affiliates with Realtors and lenders throughout the country to offer substantial discounts and rebates on real estate related services. They provide these rebates and discounts to those who serve our country and communities every day and include military personnel, firefighters, police officers and first responders. Homes for Heroes could not reach the number of heroes that it does without their affiliates.

As Homes for Heroes continues to expand we strive to find the best of the best to serve our Heroes. We have found that in our newest affiliates. From the state of Colorado which means “Color Red” and where the Rio Grande originates, Homes for Heroes would like to introduce to you our newest members.

Alisa Lewis (L) Pamela Williams (R)

Meet Alisa Lewis and Pamela Williams. This mother and daughter team are 20 year residents of the Denver area, they have been providing residents top notch Real Estate service for over 6 years. Their unique background of Accounting and Interior design will ensure that whether selling or buying a home they will make it a smooth transition. They pride themselves on being committed to exceeding your expectations through professionalism, integrity, dependability and excellence.

When not providing great customer service you can find this team enjoying the great outdoors, playing golf, biking and spending time with their families. Pam has another role of being the doting grandmother of Alisa’s 13 month old son Bradyn. Her pride and joy.

So if you live in the Denver area and are looking for a team that will put your best interests first and foremost and save you money, you can contact them by visiting the Homes for Heroes website.

Want to be part of the Homes for Heroes family? Contact Helen or Ruth at 1-866-443-7637 with any questions or visit our web site at Homes for Heroes. This is a wonderful program helping our Heroes that do so much for our communities.

The MHFA bond program follows FHA guidelines with 1 important distinction; it will only allow seller contributions of 3%.  With many sales prices close to or under $100,000, the 3% doesn’t always cover all the closing costs.  

However, in light of the proposal currently in legislation regarding the $7500 tax credit becoming a grant, it would be better for buyers to beg, borrow or steal (not literally) to come up with the 3.5% downpayment and make this an ordinary FHA loan.  The sellers can contribute up to 6% towards closing costs and the interest rate is roughly 1 point lower. 

Moreover, the $7,500 first time homebuyer tax credit will no longer need to be repaid for purchases on or after 1/1/09.  This still may be modified as this Bill has not become Law yet.”

We should hear more on this proposal after the weekend.  If it passes, the $7500 first would be applied to any monies owed, and then whatever they would receive would NOT have to be paid back.  GRANT = FREE MONEY.  Please refer clients to their accountants for more questions. Talk about a  deal!

 Law Enforcement Targets, Inc. is a designer and full service provider of training targets and supplies for military, government agencies, law enforcement, gun clubs and shooting enthusiasts.

Check them out at http://www.letargets.com

I found this video and thought the Realtor that did this was spot on. The home sold if you can believe it.

Now admit it, you might not have liked the home but you watched the whole thing. And I would be willing to bet that you were amused at the Realtors audacity. But the home sold is a short period of time. A good Realtor is a good marketer. Make sure you ask about marketing before you sign listing agreements. A Sunday ad in the local paper won’t cut it anymore.

The latest down trend is having an impact on Soldiers when they receive orders to another duty station. (In the military that is called PCS Orders, or Permanent Change Station) The good news is that at least the Congress has addressed it in the “stimulus” package. $400 million has been set aside to assist those that have to sell a home because they have received orders.

ATTENTION Homes For Heroes Blog followers! My boss called me back into her office this morning and indicated that she was beginning to worry about me, what with Ninja stories and levitating people. I have a new assignment… she wants me to feature introductions of our Homes For Heroes affiliates so that all of you followers will get to know them. All I can say is, since I can’t locate my ninja master, “She’s the boss” so here goes.

Homes For Heroes affiliates with Realtors and lenders throughout the country to offer substantial discounts and rebates on real estate related services. They provide these rebates and discounts to those who serve our country and communities every day and include military personnel, firefighters, police officers and first responders. Homes For Heroes could not reach the number of heroes that it does without their affiliates.

Watch in the coming weeks as we introduce to you the caring real estate professionals who provide outstanding service to our heroes.

Our first introduction is to Jennifer Ott, Dallas, Texas.

Jennifer Ott is a seasoned loan officer of 13 years. She is currently a Branch Manager with AmericaHomeKey, Inc. Prior to joining AmericaHomeKey, Inc. she was with Southwest Mortgage, AmeriNet Mortgage, and CTX. Jennifer has experience in processing, closing/ funding loans, Underwriting, originating loans, and managing originator teams. Jennifer has worked in both the broker and banking industry.

Some of Jennifer’s services with being a Branch Manager / Loan Officer are:

• Provide information, terms, rates, value of collateral and other requested information and keeps applicants fully informed of any requirements or necessary information
• Work directly with clients, completing all application materials, pricing the loan program, and placing them with the appropriate lender
• Communicates directly with applicants to notify them loan approval or denial
• Prospects through real estate agents or builders, and configures finance loans for new home buyers & people looking to refinance
• Manage the following key relationships: title, loan consultants, vendors and borrowers

Today she continues to enjoy helping her clients with their real estate financing needs. A longtime resident of Dallas, Texas, she is married with three young daughters who are active in soccer, cheerleading, Girl Scouts, and the community.

Jennifer Ott is also a sister to a fallen soldier. Her brother Army Specialist Chad Drake was fatally wounded in Baghdad, Iraq, when his patrol vehicle came under attack by enemy forces using small arms fire. Chad was lost in the war September 7th 2004. Chad was and is a true Hero and proof that freedom is worth fighting for. Through her loss she has found away to give honor back to the heroes amongst us. Jennifer feels truly blessed to be a part of Homes for Heroes and she is committed to servicing the heroes that are among us daily in our communities.

We at Homes for Heroes have nothing but praise for Jennifer and we are truly blessed to have her on board. So if you are living in the Texas area (yeah the whole state) and are looking to re-finance or buy a home, Jennifer is the one to call. You can get a hold of her by visiting the Homes for Heroes website.

Speaking of financing, this latest down trend is having an impact on Soldiers when they receive orders to another duty station. (In the military that is called PCS Orders, or Permanent Change Station) The good news is that at least the Congress has addressed it in the “stimulus” package. $400 million has been set aside to assist those that have to sell a home because they have received orders. The full article is here. If you want to save even more when you receive your orders get a hold of a Homes for Heroes affiliate.

Did you get out to Denny’s for the free Grand Slam meals Tuesday? I planned on going very early thinking I would beat the crowd. I called some staffers at the Homes for Heroes office asking if they would be interested in joining me for a free breakfast. Most of the staff at Homes for Heroes are Realtors and I know how much they enjoy free food. The first call I made was at 4:30 a.m., I wanted to make sure they were ready for Denny’s 6 a.m. opening.

I learned another thing about Realtors this morning. None of them, for some reason or another, like to be woken at 4:30 in the morning. I can only conclude they like their sleep more than 2 eggs, 2 strips of bacon, 2 pieces of sausage and 2 flapjacks for free. So alone I wander out into the below zero weather and head over to the nearest Denny’s. I get there at 5:45 a.m. and cannot find a parking spot. I park about 3 blocks and walk back to the restaurant. I am surprised by the amount of elderly people standing outside the door. Especially their rudeness. I learned that I should keep a 4 to 5 foot distance from the ones with canes.

Why all this hostility from our “Greatest Generation”? It took about four whacks and a couple of stitches to figure out why. These people have been going to Denny’s for years and it comes to them as a surprise the Denny’s wants to reward the nation for their patronage. They are not happy with Denny’s poor decision. I had to learn this the hard way, I hope most of you figured it out after the first smack.