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Julie M. Sturgeon: Take advantage of tax credits for your home

Posted: January 28, 2009 7:17 p.m.
Updated: January 29, 2009 4:55 a.m.
 
Did you know that if you are an American buying your first home between April 9, 2008, and July 1, 2009, the U.S. government will give you up to $7,500 in the form of a federal tax credit?

The Housing Act provides for a refundable "credit" first-time homebuyers. The tax credit is basically an interest-free government loan of 10 percent of your home purchase price, to a maximum of $7,500, to help defer the initial costs of buying your first home.

The repayment schedule is without interest and over a period of 15 years in the form of "recapture." If the residence is sold sooner, then the balance is added to that year's tax return.

How much is this credit worth? Per the law, it is worth 10 percent of the purchase price of your home up to $7,500. If you are filing a married and filing separately it is only worth $3,500.

The definition of purchase price includes the final bill for purchasing the home and includes all of the closing costs such as legal fees, title and escrow fees. The definition of a first-time homebuyer is an individual who did not have an ownership interest in a residence for three years before purchasing the home.

It is called a "refundable" credit. The fact that the credit is refundable means the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

If two or more unmarried individuals purchase a principal residence, the total credit allowed to all of the individuals is limited to $7,500.

The amount is allocated among the individuals in any manner they chose. That means if one of them owned a home before, the other partner may claim the full credit amount.

Principal residence includes all residences that qualify as a personal residence - boat or RV. Properties that do not qualify are vacation homes, foreign residences and properties previously owned by a related party.

In this case, related party refers to spouse, lineal ancestors and decedents but not brothers and sisters.

In the situation where one of the married individuals owned a home in the prior three year period, neither of the parties is eligible to take the credit even by filing a separate tax return.

Whereas, if the parties are not married and one of them owned a home in the three-year period, then the party who is the first-time buyer can take the credit.

Just like many tax credits, this one has a phase out. That means if you file a joint return and your income is between $150,000 and $170,000 the credit phases out. At the $170,000 mark you are not eligible for the credit.

The choice is yours: The credit can be taken either on the 2008 return or the 2009 return even if the property were purchased after Dec. 31, 2008.

So it's important to remember this is really a 0- percent loan that is being administered via the IRS for simplicity purposes. The intent of the loan is to help buyers afford a new house.

One caveat to this credit or "loan" is that the entire loan amount may be forgiven by the government if Congress passes all parts of the stimulus package currently on the table. We will know for certain in the upcoming weeks.

Julie M. Sturgeon is a certified public accountant in Valencia, specializing in individual and business tax issues. "It's Your Money" typically appears Thursdays and rotates between a handful of the valley's financial professionals. Her column reflects her own views and not necessarily those of The Signal.

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