First Time Home Buyer's Tax Crdit

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.


Tax Credits ‐‐ The Basics


1. What’s this new homebuyer tax incentive for 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.

2. 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.

3. 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)

4. 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.

5. How does withholding affect my tax credit and my refund?
A few examples are provided at the end of this document. There are several steps in this calculation,but most income tax software programs are equipped to make that determination.

6. Is there an income restriction?

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.

7. How is my “income” determined?

For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

8. What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?

Not always. The credit phases‐out between $75,000 ‐ $95,000 for singles and $150,000 ‐ $170,000 for married filing joint. The closer a buyer comes to the maximum phase‐out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return).

For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

Couple’s income $165,000
Income limit 150,000
Excess income $15,000



The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).
In this example, the disallowed portion of the credit is 75% of $8000, or $6000
($15,000/$20,000 = 75% x $8000 = $6000)

Stated another way, only 25% of the credit amount would be allowed. In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

10. 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.

11. 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.

12. 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.)

13. Do I have to repay the 2009 tax credit?

NO. There is no repayment for 2009 tax credits.

14. 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.

Some Practical Questions

15. 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.

16. 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.

17. 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

18. 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.

19. I haven’t even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of 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.

20. 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.

21. 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.

22. 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.

23. I live in the District of Columbia. If I qualify as a first‐time homebuyer, can I use both the $5000 DC credit and the $8000 credit?

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.

24. I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?

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.

25. What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?

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.

26. I have a home under construction. Am I eligible for the credit?

Yes, so long as you actually occupy the home before December 1, 2009.

WITHHOLDING EXAMPLES:

Note: The impact of estimated tax payments would be the same.

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.

MORTGAGE CHECKLIST

So you're ready to buy a home, are you? Well...maybe, maybe not! To be totally prepared, you should call a mortgage broker or bank before you even start looking, and get pre-approved. What's the difference between pre-qualified and pre-approved? One major item - your credit worthiness will be verified! And believe me, that goes a long way toward making the seller's agent and the seller feel more comfortable accepting your offer. When a buyer's agent submits a pre-approval letter along with an offer, it adds credibility to the offer.

What will you need for the mortgage loan originator when you actually apply for that mortgage after you've found that perfect property? The following items:

W-2 Forms - or business tax returns if you're self-employed. The last two years

Copies of at least one pay stub - for each person applying for the loan

Bank Statements - copies of two to four months of your most recent bank or credit union statements

Lender, Loand Number and Amount Owed on any loans you may have, including student loans

Account Number for Credit Cards and Charge Accounts and the outstanding balances on each

Addresses for the Last Five Years - and landlord contact information

Documentation to Verify Additional Income - such as child support, alimony, pension

Copies of Personal Tax Forms for the last two years

FIVE THINGS WHICH AFFECT YOUR CREDIT:

Your Payment History

How Much you Owe

The Length of Your Credit History

How Much New Credit You Have

The Types of Credit You Have - most mortgage companies prefer to see three types of credit, such as vehicle loans, mortgages and credit cards

THE DIFFERENCE BETWEEN PRE-QUALIFICATION AND PRE-APPROVAL

Pre-Qualification is the result of supplying information to a bank or mortgage company with no documentation involved and no credit check

Pre-Approval is the result of a more in-depth financial discussion with a bank or mortgage company, often involving documentation, and always involving a credit check; offers which are accompanied by a Pre-Approval from a bank or mortgage company carry the most weight and are generally considered more seriously than those without.

Remember, check with your bank or loan originator to see what their institution requires; it does vary some from lender to lender.

Thinking of buying or selling real estate? There's one ready source for answers to all your questions: Just Ask Allen!
aduhe@vaneatonromero.com
www.JustAskAllen.com
337-254-7812 - Allen's Cell

Wow - it's slipping by!

Good grief, how can it already be February! Didn't we just put up (and take down) the Christmas tree? Well, February means Valentine's Day, and for those of you who are on my mailing list, this month's Newsletter has a bit of Valentine's trivia. Then comes Mardi Gras, with all its activities, followed by a week of hoarseness from yelling "Throw me something, mister!"

This year, though, I'm skipping the Mardi Gras madness and heading to Destin for a few days to visit with friends from snowy Indiana who are trying to get warm. But until I can throw my bags in the car and point it toward I-10, there's work to be done (and thank goodness for it!). With the low interest rates, things are hopping; te phones usually go silent from November until the day after Mardi Gras, but things started getting busy the week of Christmas. Not that I'm complaining, mind you.

There was an interesting article in the Daily Advertiser about a week ago. Mary Jane Bauer,with our local real estate board, gave a really good synopsis of the current market. So many people watch the national news and assume that the rotten real estate market exists here, as it does in so many other places. In truth, the market here is strong - and weak offers still rarely purchase a property. With low unemployment, the Acadiana area holds steady in real estate sales. According to Mary Jane's article, we were only slightly down from last year, and really still ahead of our pre-Katrina sales (which were strong). If you'd like some information from Mary Jane's article, let me know and I'll be happy to send you a copy.

If you're a first time home buyer, you will want to check out the tax credit available to you if you buy before July 1st, 2009. You can get all the information on it at the following web site (courtesy of Jesse Regan, at Family First Mortgage):

http://www.federalhousingtaxcredit.com/index.html

If you aren't already on my mailing list, email your request to be added to it to me at: aduhe@vaneatonromero.com

If you're looking for property, check out the MLS listing on my web site:
www.JustAskAllen.com

And, as always, if you have questions about real estate, there's one ready source for all your answers: Just Ask Allen!

Laissez les bons temps roulez!

Real Estate in the New Year

Welcome to 2009! Given the changes in the international real estate markets in the last year, clients are asking what to expect in the new year. Here in Acadiana, we're blessed - while the market fervor has slowed a bit since the post-Katrina boom (causing people to think we've entered a "slow" market), we've returned to our pre-Katrina strong market. And, unlike most of the rest of the country, we have not been impacted by declining real estate values.

Unfortunately, all the national press about the terrible real estate market has had its effect on buyers, who mistakenly think that our market is following the same pattern as the national market. Some have lost out on the house they really wanted because they assumed - incorrently - that all sellers here are desperate, and that there are no willing buyers. While there was over-building in certain segments of the new home market, for the most part our market is still strong, and while prices are somewhat more negotiable, no one is giving their home away.

What does 2009 have in store for us? With interest rates at an amazingly low point, we should see more activity as winter turns to spring. Already, listing agents are feeling the impact of the lower mortgage rates by increased showings and increased offers on our properties.

Buying a home is much like buying a fine antique; when you find the right one, go for it! While you certainly don't want to give your money away, ask your agent to run a Comparative Market Analysis, using comparable sales no older than six months, to determine what a fair offer might be. Get pre-approved by a bank or mortgage company, so you can send in your pre-approval letter with your offer, and go for it! There's nothing worse than watching the face of a client who has just discovered that the house they really wanted was sold to someone else while they waited for the market to "bottom out" or for interest rates to fall even lower.

In the new construction market, there is a greater flexibility in the offers being accepted. Some builders are offering money toward closing costs, and others are willing to negotiate their sales price down. However, most builders are very concious of the effect that accepting a lower sales price will have on their future sales, and are wary; instead, they may be more amenable to a "mortgage buy-down." Consult your mortgage professional for the details on buy-downs.

If you're thinking of buying a new home, 2009 is definitely the year to do it. And if you're considering looking at houses, or if you would like to know the market value of your own present property, call me - I would be delighted to introduce you to what is available on the market, and to provide you with a complimentary Comparative Market Analysis to help establish the market worth of your property.

Happy New Year!

Once Your Offer is Accepted

In Louisiana, the standard 7-page Purchase Agreement used by all residential Realtors includes a section which refers to the inspection period. Many agents use a standard 10-day inspection period; bear in mind that this inspection period is in calendar days, not in work days. During that period, any and all inspections must be accomplished, and any request for repairs - or for money for repairs - must be submitted.

While there are no 'standard' inspections in the Acadiana region, most home buyers are advised to get at least a home inspection by a licensed Home Inspector, and a termite inspection on everything other than new construction. If the home inspection yields results which indicate the need for a more specialized inspection (for instance, an inspection by a roofer or a foundation expert), that needs to be accomplished within the same time period.

The latest purchase agreement actually gives the buyer a bit of flexibility during the inspection period; a buyer may void the purchase contract without having to give a real "reason." All that is required is saying in writing that the sale will not go forward, and a request for the return of the deposit should be made by the purchaser's agent.

Buyers have the option on new construction of either having an inspection by a licensed Home Inspector, or simply doing a walk-though with the builder and the buyer's agent to formulate a punch list. In new construction, there is a New Home Warranty, which sets the purchase of new construction apart from the purchase of an existing older home. Within the first year, any physical defects which occur - problems with heating and cooling systems, problems with wiring or roofing - are covered by the new home warranty. While many people opt for only a walk-through and punch list with the builder, bear in mind that a licensed Home Inspector will check for problems not necessarily visible on a walk-through.

Buying a home? Some things to remember....

1. Real estate contracts are only valid if they're written. Oral contracts are unenforceable.
2. Get pre-approved; offers with pre-approval letters are taken more seriously, and you'll know
you're looking in the right price range for your budget
3. If it isn't in the contract, it isn't staying with the house - make sure you ask for the things you
want...in writing
4. Start your search on-line. Before trotting out to see an endless list of properties, look on-line
at what's available and narrow your search.

Buying a new home is one of the most significant financial obligations most people make - so take your search seriously and do your homework before you enter into a contract. Find a Realtor with whom you feel comfortable and who affords you a feeling of trust, and remember that this is about what you want - the property you select should reflect your needs and wants, not those of your agent.