Tarpley & Underwood
Financial Advisors, LLC
Breaks for Homebuyers
Lately, Congress has been obsessed with encouraging people to buy houses. The Economic Recovery Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Worker, Homeownership and Business Assistance Act of 2009 all included tax credits for people who buy a home, each one more generous than the last.
The most recent credit, passed last November 2009, would give any person who hasn't owned a home for the past three years a tax credit equal to 10% of the purchase price, up to $8,000, so long as:
1) the contract is signed before May 1 of this year and
2) the buyers subsequently live in the house as their principal residence for at least three years.
To qualify for the credit, you can't buy a house from a relative, and you can't claim the credit if you can be claimed as a dependent on another person's tax return. The buyer or buyer's spouse must be at least 18 years of age, and the price of the home being purchased cannot exceed $800,000--which won't be a problem for people living in Youngstown, OH (median home price: $70,700, according to the National Association of Realtors) or Saginaw, MI ($61,400 median price), but might cause discomfort for some people living in San Jose, CA ($566,000) or White Plains, NY ($450,000). Another complexity: if you qualify for the credit, you can claim it on your 2010 tax return, or jump in the time machine and claim it on your 2009 return.
If there is more than one buyer, and they are not married, the IRS allows them to give the full credit to whichever buyer qualifies for it. Thus, parents who earn more than the threshold income can buy a house for their son or daughter. If the kids pay something toward the purchase price, they'll be able to claim the full credit on their tax returns.
Of course, this is all subject to income restrictions. The full credit is available to single taxpayers with income of less than $125,000; joint filers earning up to $225,000; and it phases out altogether at incomes above $145,000 and $245,000 respectively.
There's a smaller $6,500 credit for anybody who has owned and lived in the same home for five consecutive years during the eight years before buying a new residence. This credit might be appropriate for families who are looking to move into a larger home, or retired persons who might want to downsize their residence. (They, too, must live in the purchased house for the next three years in order to claim the credit, and the same income restrictions apply.)
There seems to be a rule in Congress that no tax initiative can ever be simple.
