Breaking Down The First-Time Buyer Tax Credit

If you bought a home at the end of last year and took advantage of the $7,500 first-time buyer tax credit, you may be kicking yourself right about now.

Why? Because last year’s tax credit has been modified—and this year’s version is much more beneficial to first-time buyers.

Below is a breakdown of the 2009 version of the first-time buyer tax credit. As always, consult with your tax advisor, certified public accountant or financial planner for details on your specific tax situation.

What are the differences between the 2008 tax credit and 2009 version? Not only does the 2009 version of the tax credit bump up the credit amount from $7,500 to $8,000, but, more importantly, the 2009 version does not have to be repaid. Under the rules of the 2008 credit, a first-time buyer must pay back the tax credit in increments of $500 spread over 15 years (basically an interest-free loan), whereas the new 2009 tax credit is exactly that: a true credit. Also, as a side note, you must claim the $8,000 tax credit on your 2009 taxes. If you claim the tax credit on your 2008 taxes, you’ll be stuck with the $7,500 credit and you’ll have to pay it back.

Who is eligible for the 2009 tax credit? The eligibility requirements for the 2009 tax credit are basically the same as for the 2008 tax credit. For the purposes of the tax credit, the IRS defines a “first-time” buyer as a buyer who as never owned a home or who hasn’t owned (or co-owned) a home during the three years prior to the date of closing. In terms of income eligibility, a buyer’s adjusted gross income must be less than $75,000 for single taxpayers or less than $150,000 for couples filing jointly. Also, if you already claimed the 2008 tax credit, you’re not eligible for the 2009 tax credit.

What are the limitations on the tax credit? There are three major limitations on the tax credit. First, you must close on your home between January 1, 2009 and December 1, 2009 (note that the date is December 1, not December 31). Second, your new home must be your principle residence. However, the IRS’s definition of “principle residence” is fairly broad. Houseboats, mobile homes, cooperative apartments and condominiums are eligible. Third, your new home must be your principle residence for three years following the date of purchase. If you sell your home within three years of your closing date, you’ll have to pay the credit back.

According to the National Association of Realtors, over 300,000 buyers will take advantage of the first-time buyer tax credit in 2009.

Will you be one of these buyers? ∆