Questions about repeat homebuyer tax credits abound.
We are getting a number of questions regarding the tax credits for real estate purchases…since the one for replacement homes is new, let’s start with it in this post.  Here are some of the most common questions:

Do I have to sell my existing home to get the repeat homebuyer tax credit of $6500 if I buy another one?   No, you do not.  You simply need to meet the requirements for the tax credit.  If you need financing to buy the replacement home, however, it behooves you to confirm your ability to get that financing up front.  Loan requirements have changed for this type of situation, both in the amount of down payment required (20-25%) and the amount of liquid reserves required (possibly enough to cover payments for both properties for at least 6 months). 

I kept my home and rented it 3 years ago when I moved to another city.  If I buy a primary residence now, can I get either of the tax credits?  Yes, you qualify for the first time homebuyer tax credit of $8000, since you have not owned a primary residence for 3 years.  The same would be true if you had kept your original home as a second home for the last 3 years.   

My husband and I would like to downsize into a smaller home.  Would a less expensive home still qualify us for the repeat tax credit?  Absolutely.  There is a top end limit of $800,000 on the price of the replacement home, but there is not bottom limit.  And the further good news is that if the capital gain on your existing primary residence is $500,000 or less, you will have no federal income tax due on the sale.

I sold my home 2 years ago and have been renting since then.  Do I qualify for the repeat homebuyer tax credit?  Provided that you lived in the home you sold for 5 consecutive years within the past 8 years, you qualify.

We are building a new home.  Will we qualify for the repeat homebuyer tax credit?  You will if you are living there by June 30, 2010, as long as you have a binding purchase contract in place by April 30, 2010.

Are there any income limits for claiming the repeat homebuyer tax credit?  Yes.  For a single taxpayer, the modified adjusted gross income limit is $125,000; for married taxpayers, it is $225,000.  Incomes of up to $20,000 more can qualify on a proportionate basis, but phase out completely at $145,000 and $245,000.  Modified adjusted gross income is the adjusted gross income shown on your tax return, plus some types and amounts of foreign-earned income.  Check with the IRS for details.

How do I get the tax credit?  You will claim it as a credit against your taxes due on either your 2009 or 2010 tax return, depending on when you close on the replacement home and when you file your income taxes.  You must have closed on the home to claim the credit and must attach a copy of the HUD-1 settlement statement to IRS form 5405. 

Are there limitations on the type of home I can buy?  There is a price limitation of $800,000.  The home cannot be purchased from a family member.  Beyond that, if it meets the IRS definition of a principal residence, it should qualify.  This means condos, townhomes, mobile homes, and houseboats as well as single family detached homes.

What if I don’t owe $6500 or $8000 in taxes?  The government will send you a check for the difference in the amount you owe and the amount of the credit. 

For more information, the National Association of Homebuilders and the IRS website both have answers to questions and examples of scenarios that are very helpful.  Ultimately, however, your best source of information is your tax advisor, because they are familiar with your specific information.

If you have a thought or an experience to share, please feel free.  Pooled knowledge is really helpful.  Just post a comment – or a further question – and we can all help each other.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!