I recently asked Richard Pazornik of SunTrust, one of my recommended loan officers, to sit down and walk through a Question and Answer session with me so that we could fully explain the new 2010 housing credit for homebuyers. As you probably know, the initial tax credit from 2008 was beefed up in mid 2009 when Congress increased the amount of the credit and stopped requiring that it be paid back over time. That program was supposed to expire at the end of November, 2009. But last Fall, the housing and mortgage industries pushed to have the credit extended. For a while, Congress seemed to be willing to let the credit expire, which would have had a devastating impact on the housing market which was struggling to stand up again.
Fortunately, Congress and the President were eventually persuaded that extending the credit was in the best interest of the economic recovery.
W: So would you go over how the tax credit works?
R: For first-time homebuyers, which means someone who hasn’t owned a home in the last three years, you’ll get that same $8,000 tax credit if you sign a contract to buy a home before midnight April 30th, 2010 and you have to go to settlement before midnight June 30th, 2010. Hopefully, we will be very busy those two days!
The new Tax Credit also sets a maximum income at $125,000 for a single person and $225,000 for a married couple. Above those limits, the credit is phased out.
W: Now, Congress has expanded the credit to “move-up” buyers. What does that mean?
R: A “move up” buyer can now get a tax credit of $6,500, if they’ve lived in their home continuously for 5 of the last 8 years as their primary residence.
The same income limits and phase outs apply to move up buyers as applied to first-time homebuyers.
W: Can someone buy any house on the market?
R: They can buy any house as their primary home so long as it’s priced less than $800,000. So here in Baltimore, this covers about 96% or more of all the homes listed in the Multiple Listing Service.
The government sweetened the deal by allowing taxpayers to go back and amend their prior year tax returns to claim the tax credit quicker and if your above the income limits in 2010, go back an look at your 2009 income, you might be better off!
W: What’s the difference between a Tax Credit and a Tax Deduction?
R: Well, a tax credit is a lot better than a tax deduction. A credit is a dollar for dollar reduction of your tax bill and a tax deduction only saves you a portion of the amount based upon your actual tax rate. Now, I wouldn’t turn either down, but I’d much rather have an $8,000 tax credit than an $8,000 tax deduction. And here’s why, if you’re in a 20% tax bracket an $8,000 deduction would save you $1,600 in taxes but the $8,000 tax credit actually saves you $8,000 in taxes. That’s why this credit is so good! But, there’s a warning I need to give. If you sell the house within three years then you must repay the $8,000.
W: So, let’s say I’m a regular wage-earner who has taxes deducted from my pay. How would this tax credit work?
R: It means your tax bill is actually decreased by $8,000. So for example, if you had $5,000 deducted from your salary for your Federal Income taxes and your tax bill computed to be $2,000, normally, you would’ve received a refund of $3,000. But, if you sign a contract to buy a house before April 30, 2010 and it settles before June 30, 2010, when you file your taxes in April of 2011, you’ll not only receive the refund of $3,000, but you’ll also get an additional tax credit of $8,000 making your total refund $11,000.
W: That’s a nice piece of change! So what is your overall impression of this new program?
R: Overall, I’m thrilled that the Homebuyer Tax Credit was extended and expanded and here are the 3 keys to remember;
- Income, $125k single, or $225k couple
- Home Price, $800000 or less, and
- Contract, signed by April 30, 2010 for settlement by June 30, 2010.