Homebuyer tax credit rumors, realities

A reader dropped me a note with her concerns about the new first-time homebuyer credit:

I heard that under the $8,000 tax amendment for new home owners, upon sale of the property the government would own half the property (guaranteed 50% equity share). Will the government own 50% of my grandson's home upon its sale? Thank you. — Dolores

Dolores, you and your grandson can relax. Uncle Sam does not want half equity in his house or the tens of thousands of others where the buyers qualify for this new tax break.

Credit clarifications: Before we go further, though, I want to clarify a couple of things.

What Dolores refers to as an amendment is actually a tax credit. The great thing about tax credits are that they apply directly to your tax bill, reducing what you owe,

And, in some cases, including this one, a credit can help you get a refund if you don't owe the IRS any money.

These are known as refundable credits, and the first-time homebuyer credit is this type. Here, if your tax bill is $7,000 and you qualify for the full $8,000 credit, the IRS will send you the $1,000 excess credit amount as a tax refund.

Also, the new credit is available for first-time homebuyers, not all purchasers of new homes. The distinction is that to qualify, you have to either (1) buy your very first ever house or (2) have not owned a home in the three years prior to the purchase in 2009 of your home.

Purchase timing: Speaking of 2009, in addition to meeting the ownership requirements, you also have to buy the property between Jan. 1 and Nov. 30 of this year.

You've probably heard the date Dec. 1, 2009, used in connection with this credit. The specific law language is that you must purchase the home before Dec. 1.

So Nov. 30, not the first day of December, is the last day you can close on your residence and claim the credit.

Credit and income limits: There also are dollar limits, related to both the buyer's income and the home's cost.

The maximum credit is $8,000 but it could be less. Technically, the credit is 10 percent of the purchase price of the home. If you bought a small house for $60,000, then you could claim a $6,000 credit, not the $8,000.

The tax break also phases out if, as a single filer, your modified adjusted gross
income is between $75,000 and $95,000. For married couples filing
jointly, the phaseout occurs when modified AGI is between $150,000 and $170,000.

You'll have to fill out a worksheet or trust your tax software to figure just how much of a reduced credit you can claim.

When your earnings are more than the top phaseout amount for your filing status, you can't claim the first-time homebuyer credit.

Repayment requirements: Finally, don't move too soon.

One of the key differences between the 2008
first-time homebuyer credit and the 2009 version approved as part of
the Feb. 17 American Recovery and Reinvestment Act stimulus deals with repayment.

The 2008 incarnation,
applicable to homes bought last year, requires that the credit (of only
$7,500) be repaid in equal installments over 15 years. You do so via subsequent 1040 filings, beginning with your 2010 return.

The 2009
credit also has a repayment clause. But it kicks in only when you quit living in the qualifying home as your principal residence within 36 months from the date you bought
it.

In most cases, you'll have to repay the credit in full on the 1040 that you file for the year the house stopped being your main home. This means, for example, you decided to start renting the place or you sold it.

But if you live in the home for three years from the date in 2009 that you bought it, you don't have to worry about ever repaying the credit.

Credit confusion or …: Now to Dolores' query. It's unclear as to whether it was sparked by: 

1. A misunderstanding of the new tax break,

2. Wrong information offered as part of a scam, or

3. Political propaganda.

Let's dispense withe these in reverse order.

Lots of folks who are unhappy that Democrats control Capitol Hill and that Obama is in the White House have been blasting any legislation that the new president and Congress support. So folks twisting a tax law in an effort to get others to join their opposition is not a surprise. In my 25-plus years of watching both parties in D.C., I've seen it happen too many times to count.

Then there are the criminal concerns. In this day and age, we can't overlook the possibility that someone circulates scary, and wrong, information as part of a scam.

Now I want to be clear: I have not heard of such a first-time homebuyer scam. And I sure don't want to give anyone ideas, not that any readers of the ol' blog would be that nefarious.

But I definitely could see a con artist scaring folks into thinking they'd lose part of their home investment unless they let the scammer, for a price of course, take care of filing the credit claim.

However, I suspect the most likely reason for the "government gets half your house" misinformation is simple misunderstanding.

Let's face it, confusion is standard operating procedure when it comes to taxes, from the changes made in the February stimulus law to the hundreds of tax provisions we've been living with for years.

Given the way the first-time homebuyer credit was created and then tweaked, as detailed in the story "First home, new tax break" that I
wrote for Bankrate, such confusion is totally understandable.

And while I'm not quite sure how this precise piece of misinformation came to be, I am glad I can dispel it.

So Dolores, if your grandson is a first-time homebuyer and he can save on his taxes by claiming the credit, good for him  He can get his $8,000 credit by filing Form 5405 and he doesn't have to worry about Uncle Sam one day owing half his house. 

More information: The IRS has several special Web pages addressing first-time homebuyer issues. They include:

• First-time homebuyer credit overview
  
• Basic information
  
• Scenarios
  
• Guidance on claiming the first-time homebuyer credit
  
• Q&A regarding homes purchased in 2009