CONSUMER SERVICES HELPLINE
TAX CREDIT TO AID FIRST-TIME HOMEBUYERS
Must Be Repaid Over 15 Years
WASHINGTON — First-time homebuyers should begin planning now to take
advantage of a new tax credit included in the recently enacted Housing
and Economic Recovery Act of 2008, IR-2008-106.
Available for a limited time only, the credit:
- Applies to home purchases after April 8, 2008,
and before July 1, 2009.
- Reduces a taxpayer’s tax bill or increases his or
her refund, dollar for dollar.
- Is fully refundable, meaning that the credit will
be paid out to eligible taxpayers, even if they owe no tax or the
credit is more than the tax that they owe.
However, the credit operates much like an
interest-free loan, because it must be repaid over a 15-year period. So,
for example, an eligible taxpayer who buys a home today and properly
claims the maximum available credit of $7,500 on his or her 2008 federal
income tax return must begin repaying the credit by including
one-fifteenth of this amount, or $500, as an additional tax on his or
her 2010 return.
Eligible taxpayers will claim the credit on new IRS Form 5405. This
form, along with further instructions on claiming the first-time
homebuyer credit, will be included in 2008 tax forms and instructions
and be available later this year on IRS.gov, the IRS Web site.
If you bought a home recently, or are considering buying one, the
following questions and answers may help you determine whether you
qualify for the credit.
Q. Which home purchases qualify for the first-time homebuyer credit?
A. Only the purchase of a main home located in the United States
qualifies and only for a limited time. Vacation homes and rental
property are not eligible. You must buy the home after April 8, 2008,
and before July 1, 2009. For a home that you construct, the purchase
date is the first date you occupy the home.
Taxpayers who owned a main home at any time during the three years prior
to the date of purchase are not eligible for the credit. This means that
first-time homebuyers and those who have not owned a home in the three
years prior to a purchase can qualify for the credit.
If you make an eligible purchase in 2008, you claim the first-time
homebuyer credit on your 2008 tax return. For an eligible purchase in
2009, you can choose to claim the credit on either your 2008 (or amended
2008 return) or 2009 return.
Q. How much is the credit?
A. The credit is 10 percent of the purchase price of the home, with a
maximum available credit of $7,500 for either a single taxpayer or a
married couple filing jointly. The limit is $3,750 for a married person
filing a separate return. In most cases, the full credit will be
available for homes costing $75,000 or more. Whatever the size of the
credit a taxpayer receives, the credit must be repaid over a 15-year
Q. Are there income limits?
A. Yes. The credit is reduced or eliminated for higher-income taxpayers.
The credit is phased out based on your modified adjusted gross income
(MAGI). MAGI is your adjusted gross income plus various amounts excluded
from income—for example, certain foreign income. For a married couple
filing a joint return, the phase-out range is $150,000 to $170,000. For
other taxpayers, the phase-out range is $75,000 to $95,000.
This means the full credit is available for married couples filing a
joint return whose MAGI is $150,000 or less and for other taxpayers
whose MAGI is $75,000 or less.
Q. Who cannot take the credit?
A. If any of the following describe you, you cannot take the credit,
even if you buy a main home:
- Your income exceeds the phase-out range. This
means joint filers with MAGI of $170,000 and above and other
taxpayers with MAGI of $95,000 and above.
- You buy your home from a close relative. This
includes your spouse, parent, grandparent, child or grandchild.
- You stop using your home as your main home.
- You sell your home before the end of the year.
- You are a nonresident alien.
- You are, or were, eligible to claim the District
of Columbia first-time homebuyer credit for any taxable year.
- Your home financing comes from tax-exempt
mortgage revenue bonds.
- You owned another main home at any time during
the three years prior to the date of purchase. For example, if you
bought a home on July 1, 2008, you cannot take the credit for that
home if you owned, or had an ownership interest in, another main
home at any time from July 2, 2005, through July 1, 2008.
Q. How and when is the credit repaid?
A. The first-time homebuyer credit is similar to a 15-year interest-free
loan. Normally, it is repaid in 15 equal annual installments beginning
with the second tax year after the year the credit is claimed. The
repayment amount is included as an additional tax on the taxpayer’s
income tax return for that year. For example, if you properly claim a
$7,500 first-time homebuyer credit on your 2008 return, you will begin
paying it back on your 2010 tax return. Normally, $500 will be due each
year from 2010 to 2024.
You may need to adjust your withholding or make quarterly estimated tax
payments to ensure you are not under-withheld.
However, some exceptions apply to the repayment rule. They include:
- If you die, any remaining annual installments are
not due. If you filed a joint return and then you die, your
surviving spouse would be required to repay his or her half of the
remaining repayment amount.
- If you stop using the home as your main home, all
remaining annual installments become due on the return for the year
that happens. This includes situations where the main home becomes a
vacation home or is converted to business or rental property. There
are special rules for involuntary conversions. Taxpayers are urged
to consult a professional to determine the tax consequences of an
- If you sell your home, all remaining annual
installments become due on the return for the year of sale. The
repayment is limited to the amount of gain on the sale, if the home
is sold to an unrelated taxpayer. If there is no gain or if there is
a loss on the sale, the remaining annual installments may be reduced
or even eliminated. Taxpayers are urged to consult a professional to
determine the tax consequences of a sale.
- If you transfer your home to your spouse, or, as
part of a divorce settlement, to your former spouse, that person is
responsible for making all subsequent installment payments.