Dissecting the 'second-time' homebuyers $6,500 tax credit

Posted by Ken Harney, real estate columnist with the Washington Post on 2 February 2010 | 10 Comments

Dissecting the ‘second-time’ homebuyer tax credit
A look at who qualified for the new, less known federal break

Written by: Ken Harney, Real Estate columnist with the Washington Post

Take a close, hard look at the new $6,500 federal tax credit for so called move-up homebuyers that passed the Senate and House last month. Though it’s been getting second billing to the original $8,000 credit for first-time purchasers – now extended by Congress through next June 30th – the $6,500 credit for current homeowners just might have your name on it.

How does it work? When will it be available?

First things first: The new credit is available now. It took effect the day President Obama signed the legislation creating it – November 6th. This means that if you fit the key criteria – you’ve owned and resided in your current home for a consecutive five out of the past eight years, and your adjusted household income doesn’t exceed $125,000 if you file taxes singly, $225,000 if you are married filing jointly – you can claim the credit as soon as you close on a qualifying house.

That could be next week, next month or next spring. There is no move up requirement in the new credit. In fact, homeowners who plan to downsize into a smaller dwelling may prove to be significant users of the credit, along with people who are relocating because of employment changes.

If you fit the criteria and are considering buying another house sometime in the coming year, you might want to speed up the process and sign a contract by next April 30 and close by the June 30th expiration date. Think of it this way: If the government is willing to give you $6,500 to act a little faster than you had originally planned, hey, why not?

Some other key features of the $6,500 credit you ought to know about: Whatever you intend to purchase, the house cannot cost more than $800,000.

The replacement house must become your main home. There is no requirement in the legislation that you sell your current home. You could rent it out, turn it inot a second home or list it for sale later in 2010, when prices might be higher. If you plan to retain it, however, make sure you move into the new house on the day you close so that there is no question it was your principal residence at that time.

Like the first-time buyer credit, the $6,500 version permits a broad range of dwelling types for your purchase. These include newly constructed or existing single-family homes, condos, manufactured or mobile homes, and boats that function as your principal residence. You cannot claim the credit if you are buying a second home or investment property.

The IRS is required by Congress to scrutinize claims for tax credit far more closely in the coming months than it did earlier in 2009. This is because federal investigators have documented significant instances of fraud – supposed homebuyers who were actually minors, and bogus “sales” that were totally fabricated. Investigators also found numerous cases of technical violations, such as purchase transactions among immediate family members..

The revised rules require taxpayers to submit copies of their settlement statements (HUD-1 forms), along with their requests for credits using IRS Form 5405. Congress’ new rules also prohibit individuals under the age of 18 or who are counted as dependents on another taxpayer’s filing from claiming the credit.

Homebuyers in 2009 – those who got to closing after November 6th but not later than December 31st – can claim the $6,500 credit on their 20009 federal tax returns, or amend their 2008 returns. Similarly, eligible purchasers in 2010 will be able to file for the credit on their 2009 or 2010 returns.

If you aren’t sure if you can make the deadlines established for the new credit – a binding contract by next April 30 and a settlement by June 30 – do not assume that Congress will provide another extension. All the political and budgetary signs point the other way, and some of the primary authors of the credit insist that this is it – no more extensions next year. Take them at their word.

From the desk of Mimi Neuhaus