They’re Advertising The $8,000 First-Time Homebuyer Tax Credit But You May Not Be Eligible To Claim It.

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UPDATE: The First Time Home-Buyer Tax Credit was expanded and extended. The information in this post may be inaccurate. Read the updated First-Time Home Buyer Tax Credit post instead.

As part of the American Recovery and Reinvestment Act of 2009, Congress authorized a first-time homebuyer tax credit of up to $8,000.  The $8,000 credit replaced the $7,500 tax rebate program that was included in 2008's stimulus program.

In the two months since its rollout, the $8,000 first-time homebuyer tax credit has provided a veritable boost to the housing market in places like Mount Adams and Oakley in Cincinnati, and Southpost Corridor in Chicago, to name a few.  First-time home buyers now account for more than half of all home sales, according to an industry report.

One of the biggest reasons why the $8,000 tax credit is working is because, unlike its 2008 counterpart, the government doesn't require the 2009 version of its tax relief plan to be paid back over time. First-time home buyers in 2009 can claim their credit and never look back.

And best of all, the credit is automatic -- there's no extra paperwork to sign with your real estate agent and no additional disclosures between the buyer and the seller.  First-time homebuyer tax credits are tax events, not housing ones.

But even though some real estate agents and mortgage lenders position and market the $8,000 credit as a universal program, it's important to know that not every first-time home buyer is eligible.  The IRS definition of "first-time homebuyer" may be different from what you expect.

According to the IRS, a first-time homebuyer is anyone who has not owned a "main home" in the last 3 years where "main home" is defined as a home in which a person has lived for most of the time. It can include traditional homes, houseboats, trailers and other residence types.

The IRS also defines what it means to be a first-time homebuyer with respect to couples.

Based on the IRS definition, there's no clean way for spouses or soon-to-be-married types to "cheat the system" and take an undue $8,000 in tax relief. This is because the $8,000 First-Time Homebuyer Tax Credit requires both homeowners to be first-time homebuyers in order to claim the credit.

Furthermore, the IRS instructions show that not every first-time homebuyer will be eligible to claim an $8,000 tax credit.  Some notable, exclusionary cases include first-time homebuyers who:

• File taxes separately and whose adjusted gross income exceeds $95,000
• File taxes jointly and whose adjusted gross income exceeds $170,000
• Acquire property from a mother, father, spouse or child
• Acquire property from a corporation/partnership in which they're a majority owner
• Acquire the home by gift or inheritance

And for some buyers, the available credit may fall short of the promised $8,000.

First of all, the value of the First-Time Homebuyer Tax Credit is limited to 10 percent of the home's purchase price.  A home purchase price of $75,000, therefore, caps the first-time homebuyer's tax credit at $7,500.

And secondly, the value of tax credits diminish as homebuyer income rises.  Tax credit phase-outs start at $75,000 for homebuyers filing separately and $150,000 on joint returns, up to the program's adjusted gross income limits of $95,000/$170,000.

The worksheet portion of The First-Time Homebuyer Credit tax form is above.

It's pretty straight-forward in that there are just 10 fields of entry.  Fill in the form and you'll know how large (or small) of a First-Time Homebuyer Tax Credit to which you're entitled.  To claim your credit:

• Buy and close on a new, "main" home before December 1, 2009
• Submit Form 5405 with your 2009 tax returns in April 2010

That's it.

If you do qualify for the credit,beware of the program's gotchas, though. For example, If you sell your home, or cease to use it as your "main home" within 36 months, the IRS will require a full payback with only a few allowable exceptions.  Not moving in the next 3 years? Don't worry about it.

And lastly, don't just take my word for it on tax issues. I am a loan officer and not an accountant. I can offer basic guidance, but paying a professional for expert advice is often the right way to go. If you don't have an accountant you trust or you're not using the free filing and tax audit services of TurboTax or something, call or email me for a recommendation.