Many buyers now ready to claim big tax credits
Millions of first-time and “repeat” buyers who purchased a home last year are eligible for handsome credits that can slash thousands of dollars off the tax returns that they're completing now.
Q. We sold our longtime home last year and traded up to a more expensive one, while my brother and his wife bought their very first home just a few blocks away. How do we claim our respective home-buying tax credits when we file our federal income-tax returns?
A. More than 3 million homes changed hands last year, and many of their buyers — whether it was their first home or not — qualify for generous credits that can trim thousands of dollars off their upcoming tax bills. I'm devoting this entire column to answering some of the most common questions that readers have asked recently.
The most widely publicized tax-credit program provides up to $8,000 in credits to people who purchased their first home last year. Another, though, provides up to $6,500 to repeat buyers like you.
Both programs expired near the end of 2010, but the credits still can be claimed by buyers on their upcoming returns if they meet Internal Revenue Service rules.
Q. How does the IRS define “repeat buyer” and “first-time buyer”?
A. Surprisingly, the two definitions are fairly loose. The law defines a first-time homebuyer as someone who had not owned a principal residence in the three years before his or her 2010 purchase. That's an important loophole for millions of people who were lucky enough to unload their homes as the market began to tank in the mid-2000s, rented for a few years, and then were able to purchase another house last year.
The separate repeat-buyer tax credit is available to those who lived in their previous home for at least five consecutive years of the previous eight before the new home was purchased. If married, both spouses must meet this so-called residency test.
Q. How much are the tax credits worth?
A. Taxpayers who meet the first-time buyer's guidelines get a credit worth 10 percent of the purchase price of the home, up to a maximum of $8,000. Repeat buyers can get up to $6,500 of their purchase price.
It's important to note that credits are much more valuable than deductions. That's because a $1 credit directly knocks $1 off any taxes you owe. A $1 deduction will trim only 28 cents from the return if you're in the typical 28 percent tax bracket.
Q. If the two programs were ended last year, was there any deadline that our deal had to close in order to claim the credit on the 2010 return that we are completing now?
A. Yes. And technically, there are a few.
To be eligible for either credit, you must have signed the sales contract before May 2010. The contract also must have stated that the purchase would be completed by June 30, though Congress and the Obama administration later gave buyers until Sept. 30 to close their deals officially, because lenders were already backlogged with the paperwork involved in processing foreclosures and other sales.
Q. Are there any price limits or income guidelines that will prevent us from claiming one of these tax credits?
A. Yes. Buyers of homes that cost $800,000 or more aren't eligible for the tax break.
In addition, only a partial credit is available to single tax filers whose adjusted gross income ranges from $125,000 to $145,000 and for married joint filers who earn between $225,000 and $245,000. Neither credit is available to those who earn more.
Q. Do I have to file a special form to get it?
A. Yes. Regardless of which credit you claim, you'll have to complete IRS Form 5405, First-Time Homebuyer Credit. You can order the form and related instructions by calling the IRS at 800-829-3676 or by downloading them at the agency's website, www.irs.gov.
Importantly, you also must attach a copy of the properly executed settlement statement (or similar documentation) that was used to complete the purchase. This rule was initiated after government inspectors found that tens of thousands of people — including about 1,300 felons who were already behind bars when they filed their returns — illegally claimed credits for property that they hadn't really purchased.
There are some smaller strings attached to both tax-credit programs, but they're strong enough to snare you or even trigger an audit if you don't understand all of them. Because there's so much money at stake, it might be wise to have your return prepared by a tax professional this year even if you have traditionally done all the paperwork yourself in the past.
On another note, our booklet “Straight Talk About Living Trusts” explains how even low- and middle-income homeowners can now reap the same benefits that creating an inexpensive trust once provided only to the wealthiest families.
• For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960
© 2011, Cowles Syndicate Inc.