Extended and Expanded

The $8,000 homebuyer tax credit for first-time buyers, due to expire in 25 days, has been extended through April 30th of next year and buyers will have an additional two months, until the end of June to close. First-time buyers who are in the process of making a purchase will no longer need to worry about qualifying for the $8,000 credit if they close after the November 30th deadline. The new legislation increases the income limit for couples with income up to $225,000, a nearly $55,000 increase above the level in existing law.                                                                                                                                                                                                                                           For the first time, the new legislation makes buyers who already own a home eligible for a credit. A $6,500 maximum credit will be available to existing homeowners who have lived in their current residence for five of the prior eight years. The legislation limits eligibility for the existing homeowner credit to homes worth $800,000 or less. The legislation takes effect December 1 and is not retroactive. Both credits are available only for primary residences, not second homes or investment properties.Eligibility depends on a number of factors, including income, homeownership status, and the exact purchase date of the home.  To be considered a first-time buyer by the IRS, you must not have owned a home for the three years prior to your purchase. Longtime homeowners must™ve lived in their homes for five consecutive years during the past eight years.

The IRS has also spelled out new guidelines for the credit when co-borrowers purchase a property. When a home-owning parent of an adult child co-signs for a mortgage and both names appear on the note, the IRS says that under some circumstances, the first-time home buyer can qualify for the full $8,000. The parent doesn’t qualify for any portion of the credit, but if the child hasn’t owned a home during the three years preceding the current purchase and can qualify based on income, he or she can be allocated the entire $8,000 credit.

When unmarried individuals co-purchase a home and only one of them is eligible for the credit, then the full $8,000 can be allocated to the eligible buyer.

Revised rules apply to those who buy between Nov. 7, 2009, and April 30, 2010. Buyers who made purchases on or before Nov. 6, 2009, are covered under an older set of guidelines.

New rules for first-time homebuyers

First-time buyers who purchase a home between Nov. 7, 2009, and April 30, 2010, may be entitled to a  federal tax credit  worth 10% of the sale price or $8,000, whichever is lesser. Income restrictions apply. The tax credit for joint filers begins to phase out at a modified adjusted gross income of $225,000 ($125,000 for individual taxpayers). The credit disappears entirely at $245,000 for joint filers ($145,000 for individuals).While first-time buyers must enter into a binding contract to purchase a principal residence by April 30, the closing can take place as late as June 30, 2010. The home can™t cost more than $800,000.Qualifying purchases in 2009 can be claimed on your 2008 or 2009 return. File an amended return for 2008. Purchases in 2010 can be claimed on your 2009 or 2010 return. To get the credit for the 2009 tax year on a purchase that closes after April 15, 2010, either request an automatic filing extension or file an amended 2009 return.The first-time homebuyer tax credit is œrefundable, meaning you can earn it even if you owe no federal tax, the credit exceeds your total tax liability, or you have little income. Claim the credit on IRS Form 5405, which should take less than an hour to fill out. It™s a good idea to consult a tax adviser.

Old rules for first-time homebuyers

First-timers who bought a home between Jan. 1, 2009, and Nov. 6, 2009, may also be eligible for a federal tax credit worth up to $8,000. A tax credit reduces your tax bill or increases your refund dollar for dollar. In general, whether under the old rules or the new rules, you™ll be required to repay the full value of the credit to the IRS if you don™t maintain the home as your principal residence for three years.First-time buyers subject to the old rules face tighter income limit. The phase-out kicks in for joint filers when modified adjusted gross income hits $150,000 ($75,000 for individual taxpayers). It disappears entirely at $170,000 for joint filers ($95,000 for individuals). Married filing separately taxpayers can claim only up to half of the $8,000 credit.First-time buyers in 2008 were subject to a  different tax-credit program. Homes purchased after April 8, 2008, and before Jan. 1, 2009, were eligible for a credit worth the lesser of $7,500 or 10% of the home™s purchase price. Income limits and phase-out ranges were the same as those for first-time buyers between Jan. 1, 2009, and Nov. 6, 2009.The biggest difference between 2008 and 2009 was that the tax credit in 2008 really functioned as an interest-free loan that must be paid back over 15 years. The first of the annual installments should come due on the 2010 tax return filed in 2011. With few exceptions, if your home ceases to be your main residence during those 15 years, you have to pay back the outstanding amount with the subsequent tax return.

Tax credit for longtime homeowners

If you™re a longtime homeowner”meaning you™ve lived at your principal residence for five consecutive years out of the last eight”you may qualify for a homebuyer tax credit worth up to $6,500. You must purchase a new principal residence between Nov. 7, 2009, and April 30, 2010. Like the first-time homebuyer tax credit that applies to these dates, you can settle as late as June 30, 2010, as long as you have a binding contract by April 30.The same $800,000 cap on the purchase price applies to longtime homeowners, as do the same income restrictions. The credit begins to phase out for joint filers at modified adjusted gross income of $225,000 ($125,000 for individuals), and disappears at $245,000 ($145,000 for individuals). Married couples filing separately are eligible for up to half of the $6,500 credit.For both first-time and longtime buyers who want to claim the tax credit for a purchase made after Nov. 6, 2009, the IRS requires proof. Attach a copy of the settlement statement you received at closing to your return. You must be at least 18 years old.

Other restrictions and provisions

As long as they serve as principal residences, single-family homes, townhouses, co-ops, and condos are all eligible for a tax credit. Mobile homes may be eligible for the credit, even if the land itself is leased. Owning a vacation home or rental property doesn™t disqualify you as a first-time homebuyer, but you do have to make it clear such properties were never your principal residence.You won™t be eligible for the tax credit if you™re buying from a close relative. For example, if your mother goes into a nursing home and you buy her house from her, you can™t claim the credit. Close relatives include parents, grandparents, children, grandchildren, your spouse, and your spouse™s family.