By Diana Hill, Online Trading Academy Real Estate Investor Instructor
As many of you may be aware of, the early part of my professional background and my education was in accounting and taxation. One of the great advantages of real estate is the tax benefits. So, even though I no longer practice nor prepare my own tax returns, I still keep abreast of the tax laws affecting real estate and real estate investing.
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8000 for qualified first-time homebuyers purchasing a principal residence on or after January 1, 2009, but before December 1, 2009. As this deadline approaches, I'd like to answer some of the most frequently asked questions regarding this credit. I'll also give you an update of changes to this credit, what we may see in the future, and how it's good for investors.
A first time homebuyer is defined by this law as a buyer who has not owned a principal residence during the last three year period prior to the purchase. For the purposes of the tax credit, the purchase by this first-time homebuyer must be before November 30, 2009 and that date is defined by when the closing occurs and the title to the property is transferred. The tax credit is equal to 10% of the home's purchase price up to a maximum of $8000.
The only other requirements for the first-time homebuyer are the income limits for claiming the credit:
- The income limit for a single taxpayer is up to $75,000, and the limit for married taxpayers filing a joint return is $150,000.
- The homebuyer must live in the property for three years.
The tax credit is very liberal when it comes to the types of homes that can be used as a principal residence. This includes single family detached homes, attached homes such as townhouses and condominiums, manufactured homes (also known as mobile homes), and houseboats.
It is important to note that you cannot purchase a home from an ancestor, and that the transaction must be an arm's length transaction.
Many first-time homebuyers want to find out if there is a way to access the money allocated to the credit sooner than waiting to file their 2009 tax return. There are two scenarios in which this can be successful:
- Prospective homebuyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his or her take-home pay.
- The money can then be applied to the down payment. If the buyer is using an FHA insured mortgage, they can apply their tax credit toward their home purchase immediately, rather than waiting until they file their 2009 income taxes. These funds may be used toward down payment and closing cost expenses.
The first major change to the $8000 homebuyer tax credit began moving through Congress the third week of September, giving hope to real estate and building groups pushing for the extension of the entire program before it expires November 30, 2009.
House Ways and Means Committee Chairman, Congressman Charles Rangel, a New York Democrat, combined several smaller bills into the "Service Member's Home Ownership Act of 2009."
The bill is intended to correct a flaw in the original tax credit legislation: By requiring buyers to occupy their first home for 36 months to fully qualify for the credit, the program creates serious problems when military, foreign service and intelligence agency personnel are transferred overseas.
Oregon Congressman Earl Blumenauer, sponsor of one of the bills consolidated into Rangel's, said, "It's absurd that thousands of Americans serving our country, away from friends and family...must choose between their service work and homeownership."
Another provision in the bill would extend the $8000 credit for another year for personnel who may have missed out on claiming the credit because they thought they wouldn't qualify due to overseas posting.
More importantly for the housing market overall, however, is the precedent set by the bill that extends the credit for an extra year. It's not a far leap from that position to a general extension of the entire $8000 credit program to the same date.
The National Association of Realtors, National Association of Homebuilders and the Mortgage Bankers Association jointly sponsored an ad campaign last week aimed at convincing Congress to give the credit program another year. This tax credit can be directly linked to the increase in activity in the residential real estate market, a very important part of our economic recovery.
The advantage this tax credit gives real estate investors is the incentive for new buyers to get into the market. As investors, it's a great benefit to know that we have a strong buyer base for quick turn properties.
I'll keep my eye on this legislation and let you know of its progress. But I do encourage any of you that haven't taken advantage of this credit and meet all the criteria not to wait and to take action now.
Great Fortune,
- Diana Hill
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