Homebuyer Tax Credit Extended

Tax Tips & Calculators  Tax News  Homebuyer Tax Credit Extended

By Catherine Gordon, Toolkit Staff Writer

President Obama signed, on July 2, 2010, the Homebuyer Assistance and Improvement Act of 2010. The law extends eligibility for the $8,000 first-time homebuyer tax credit through September 30, 2010. This extension allows eligible buyers three additional months to close on property, provided that they entered into a binding purchase contract before May 1, 2010.

The extension was enacted in response to concerns that many homebuyers would be unable to meet the original closing deadline of June 30, 2010. The new closing deadline applies only to homebuyers who entered into a binding purchase contract before May 1, 2010. The bill does not extend the deadline for entering into a purchase contract.

The popular first-time homebuyer tax credit allowed qualified homebuyers to claim up to an $8,000 tax credit on the purchase of a new home. Generally, if you entered into a purchase contract by April 30, 2010, and will close on the purchase by September 30, 2010, you can claim a tax credit of 10 percent of the purchase price (up to $8,000).

The first-time homebuyer tax credit is available only to those who have not owned a home for the three years leading up to the purchase. However, despite its name, the credit is also available, at a reduced level ($6,500), for those who have lived in their current home for at least five consecutive years during the previous eight years.

There are some income limitations, though, for both categories of homebuyers. The tax credit phases out between income levels of $125,000 and $145,000 for individuals and $225,000 and $245,000 for joint filers.

How do you claim this tax credit if you meet the requirements? There are three options for claiming the homebuyer tax credit on a qualifying 2010 purchase:

• If you haven't filed your tax return for 2009 yet, you can claim the credit on your 2009 tax return. This is true even though the transaction took place in 2010.
• If you have already filed a tax return for 2009, you can file an amended return and claim the credit. Again, this applies even though the transaction took place in 2010.
• You can wait and claim your credit on your 2010 tax return. This option is available whether or not you have already filed a tax return for 2009.

A properly completed Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, must be included with your tax return to claim the credit. You must also provide documentation of your purchase. A signed copy of the HUD-1 settlement sheet including the contract sale price and the date of closing must be included with your tax return.

If a homebuyer claims the credit on a newly constructed home where a HUD-1 is not available, a certificate of occupancy may be sufficient. A retail sales contract is sufficient in the case of a mobile home purchase. Long-term resident homebuyers must also include written evidence to document their ownership and occupancy of their existing home. These requirements for documentation were put in place in response to apparent widespread abuse of the homebuyer tax credit earlier in the program.

Note that the title of Form 5405 includes the phrase "Repayment of the Credit." This is because Form 5405 is used to both claim the homebuyer tax credit, as well as repay it if certain events occur. You may be required to reimburse the IRS for the credit taken if you sell your new home within 36 months after you purchase it.

The credit must also be paid back if your new home is converted from a principal residence to a rental or business property during the 36-month period following the purchase. In the unfortunate scenario where the lender forecloses on your home during those 36 months, the credit must be paid back.

If you're a qualifying buyer with a binding home purchase contract and had given up hope of closing in time to claim the homebuyer tax credit, here's your chance to get in under the wire! While nothing is certain, this is, in all likelihood, your last chance to claim this popular credit.