Federal law has just extended and increased the availability of a federal income tax credit for certain buyers of a principal residence. These important changes could make it easier for you or someone in your family to buy or sell a home. The changes offer new opportunities under recently expired rules.

Pre-Amendment Home Credit Rules

Previously, the home buyer credit was available for qualifying first time home purchases after April 8, 2008 and before December 1, 2009 with a limit of $8,000 for married individuals filing jointly ($4,000 for married individual filing separately) or 10% of the residence purchase price, whichever was less.

A principal residence located in the US qualified for the credit, but vacation homes and rental properties did not. However, as a credit this incentive was powerful because it reduced federal income tax liability dollar for dollar and if it exceeded tax liability, it provided a refund. If a home was purchased after December 31, 2008 but before December 1, 2009 and then was disposed of within 36 months of the date of purchase, the credit had to be paid back to the IRS (recaptured). The principal residence buyer credit was phased out for taxpayers purchasing principal residences before November 7, 2009 with adjusted gross income between $75,000 and $95,000 for individuals and $150,000 and $170,000 for joint return filers.

New Home Credit Extension, Expansion and Other Changes

1. Short extension. The home buyer credit is now extended for purchases of principal residences before May 1, 2010, and even to purchases that are closed July 1, 2010 if a written binding contract is entered by May 1, 2010. Individuals on official extended duty outside the U.S. Have an extra year. Additionally, individuals who have owned homes for any five consecutive years during the prior 8 years can claim the credit in addition to other qualifying “first time purchasers.” A home buyer does not have to sell the buyer’s prior primary residence during the limited extension to qualify for the new home purchase credit. For example, if an empty nester chose to sell a home to downsize, as long as the purchase of the new residence is completed within the required time periods, there is no requirement that the home from which the downsizing taxpayer was moving was sold during the time period. As a result, the replacement residence could be purchased to beat the new deadlines even before the prior home is sold. The maximum allowable home buyer credit for qualifying existing homeowners (as opposed to first time homeowners) is $6,500 ($3,250 for a married individual filing separately) or 10% of the purchase price of the replacement residence, whichever is less.
2. Credit available to higher income taxpayers. The home buyer credit is available to higher income taxpayers: for purchases after November 6, 2009, the credit phases out over higher levels of adjusted gross income from $125,000 to $145,000 for individual filers and between $225,000 and $245,000 for joint filers, however, the maximum value of the home that can be subject to the credit is capped at $800,000. This cap has the effect of a ceiling because if a home is purchased for more than $800,000, the entire credit will be lost. Of course in today’s market, many homes previously valued at much more would qualify within this limit. Other limitations apply.

This limited available window for the credit may present an important opportunity to you or a member of your family or to others you know.

Other Tax Law Developments

Additionally, as you know substantial other tax law developments improve the tax consequences of foreclosure, or negotiating debt reductions, and for certain individuals engaged in short sales.

We welcome your inquiry. In any of these situations, expert tax advice is recommended.

Kemp Klein attorneys are ready to assist you with the analysis and amendments needed.