Buying Your Home

RE/MAX Real Estate FAQ - Buying Your Home, Working With A Real Estate Agent

Buying Your Home - Questions and Answers
'Tax Considerations'

Are there tax credits for first-time home buyers?
What are the details of the 2009 -2010 Tax Credit Extension?
How do I save on taxes?
Explain the home mortgage deduction.
What home-buying costs are deductible?
Are seller-paid points deductible?
Are points deductible?
What is the Mortgage Credit Certificate program?
When is the best time to buy?
How do you choose between buying and renting?
Should I buy a vacation home?
Are taxes on second homes deductible?
Will my vacation home qualify for a '§1031 Exchange
How are fees and assessments figured in a homeowners association?
How do I reach the IRS?
Where do I get information on IRS publications?

Are there tax credits for first-time home buyers?

2008 ACT. In July of 2008, then President Bush signed the "Housing and Economic Recovery Act" into law. This legislation contained several provisions to get home buyers back into the marketplace, stop the slide in home prices, provide a lifeline to borrowers facing foreclosure, improve mortgage liquidity and bolster confidence in Fannie Mae and Freddie Mac.
The 2008 tax credit was essentially an interest-free loan equal to 10% of the purchase of any home (up to a maximum purchase price of $75,000) by first-time home buyers. The provision applied to homes purchased between April 9, 2008 and July 1, 2009. (Now ended December 31, 2008 ... see below).
Homes purchased in 2008 must follow the guidelines of the 2008 Act.
2009 ACT. The "American Recovery and Reinvestment Act of 2009" modified the 2008 Act. Congress now provided a tax credit of up to $8,000 for first-time home buyers that did need NOT be repaid. Only homes purchased on or after January 1, 2009 and before December 1, 2009 were eligible.
NEW 2009 - 2010 Tax credit plan (November, 2009 to April 30, 2010)
In November of 2009 the original 2009 plan was both extended and amended to include a tax credit plan for all homebuyers. The homebuyer tax credit expansion measure includes these provisions:
1. Extends the $8,000 first time Homebuyers Tax Credit and creates a new $6,500 tax credit for homeowners buying a new home from December 1, 2009 to April 30, 2010.
2. Homebuyers with contracts as of April 30 qualify for the credit so long as they complete the transaction within 60 days.
3. Available to homebuyers with incomes of up to $125,000 for a single return or $225,000 for a joint return.
4. Not available for homes costing over $800,000.
5. Homebuyers who already own a home are only eligible if the home they are leaving has been used as a principal residence for 5 years or more.
6. Provides authority to the IRS to do greater oversight while processing the return and requires that the taxpayer claiming the credit be 18 or older.
7. Members of the military, military intelligence and foreign service who are on qualified extended official duty are not subject to the recapture fee and individuals who have been deployed overseas for 90 days or more in 2008 or 2009 can claim the credit through April 30, 2011.
© 2009 RE/MAX International, Inc. All other rights reserved

Basics of the New Tax Credit Program

The American Recovery and Reinvestment Act of 2009 includes a provision for qualified first-time U.S. homebuyers to receive a tax credit of up to $8,000. In November 2009, the provision’s deadline was extended and the credit was expanded to give most other homebuyers a tax credit of up to $6,500.

The credit amounts to 10 percent of the purchase price up to the credit limit. So a home purchase of $80,000 or more would be good for the full $8,000 credit for "first-time" buyers; and a home purchase of $65,000 or more would be good for the full $6,500 credit for qualifying "repeat" buyers. No credit is available for home purchases that exceed $800,000.

The credit never has to be repaid, provided that the buyer continues to own and live in the home as a principal residence for a minimum of three years straight. Under the deadlines revised in November, buyers must have a written, binding contract in place before May 1, 2010 and close before July 1, 2010.

Note: As with any tax legislation, the details can quickly become complex with individual filers’ unique situations. We encourage you to confirm your eligibility and pursue your filing questions directly with the IRS or your own tax professional.

New Tax Credit Details

An individual qualifies as a first-time buyer if neither he nor she, nor their spouse, owned a principal residence in the United States in the three years prior to closing.
An individual qualifies as a repeat buyer if he or she, or their spouse, owned and lived in a principal residence in the United States for five consecutive years within the eight years prior to the closing date.
Even if a co-borrower (or someone providing help with the down pay-ment) is ineligible for the credit, the otherwise qualified buyer remains eligible – meaning a parent can help a child (nondependent and at least age 18) buy a home – and the child can receive the credit.
Buyers can receive the full credit even if they don’t owe any taxes for the year in which they file for the credit.
There are income restrictions, which were revised upward with the November modification. The full credit can be taken by individual filers with Modified Adjusted Gross Incomes up to $125,000 and joint filers up to $225,000. The credit phases out after that and is eliminated at $145,000 for individuals ($245,000 for joint filing). Be aware of the distinctions between Adjusted Gross Income, Modified Adjusted Gross Income and Taxable Income.
This IRS Web page has details on calculating Modified Adjusted Gross Income. We encourage you to consult directly with the IRS, IRS Web site or a tax professional to fully understand how these restrictions apply to your personal financial situation.

How Can Buyers Use The New Tax Credit?

You can claim the credit only after closing on your home purchase.
For purchases closed in 2009, you can claim it on their 2009 federal tax return or you can file an amended 2008 return to receive the money sooner.
For qualifying purchases closed after Dec. 31, 2009, taxpayers can treat the purchase as if it were made on Dec. 31, 2009 for tax filing purposes to receive the credit earlier than via their 2010 return.

New Tax Credit Exceptions For The Military

Otherwise qualifying military personnel and certain other federal workers on extended duty outside the United States have an extra year to buy a principal residence. There also are repayment exemptions if the requirement to own and live in the purchased property for three years is not met because of extended-duty orders. Here are more details from NAR.

Using The New Tax Credit For Down Payment Or Closing Costs

Some lenders, non-profits and state housing agencies offer bridge loans that enable buyers to borrow against the tax credit to help with a down payment or closing costs. Even FHA-insured mortgages can be linked to such programs. Options for turning the credit into cash vary widely. Costs vary, too. Here’s basic information about the FHA program.

Here’s a site that links to details on state programs, some of which include specific FHA options.

Frequently asked Questions >>

IRS Tax Credit Basic FAQs (ongoing updates per Nov. 6 changes)
IRS 2009 Tax Credit FAQs (ongoing updates per Nov. 6 changes)
First-Time Buyers ($8,000) FAQs: National Association of Home Builders
Repeat Buyers ($6,500) FAQs: National Association of Home Builders

Associated Federal Programs >>

Good Neighbor Next Door Initiative (HUD)I
203(k) Rehabilitation Loan Details (HUD))

How do I save on taxes?

Property taxes and interest on your home mortgage are deductible every year if you itemize. Therefore, if your property taxes and paid interest total $15,000, and your in the 25% tax bracket, you will save $0.25 on every dollar, or $3,750. But be careful, don't spend it on the come, because, if you have never itemized before and have been taking the standard deductions, you'll probably find that your actual savings will be just a little over $1000.

How can that be? Well, only deductions in excess of the standard allowable deductions you've already been taking will come into play. In our example that would be about $5,000 for married individuals filing jointly. However, now that you're able to itemize because of the large property tax and interest deduction, other allowable deductions that were of no consequence when you took the standard deduction, can be used to further enhance your total deductible amount. You can now itemize charitable contributions, certain medical expenses, home office expenses, and the like. It can quickly add up! If your vigilant, and keep good records, your tax savings can be considerable.

See Also >> Real Estate Guide: Home Ownership (Tax Considerations) - What tax benefits are there to homeowners?

Explain the home mortgage deduction

See >> Real Estate Guide: Home Ownership (Tax Considerations) - The home mortgage deduction.

What home-buying costs are deductible?

Any points you or the seller pay to purchase your home loan are deductible for that year.
Property taxes and interest are deductible every year.
Home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis)
- These fees would include:
  - title insurance
  - loan-application fee
  - credit report
  - appraisal fee
  - service (escrow) fee
  - settlement or closing fees
  - attorney's fee
  - document preparation fee
  - recording fees
Any points you or the seller pay to purchase your home loan are deductible for that year.
Property taxes and interest are deductible every year.
Points paid when you refinance an existing mortgage must be deducted ratably over the life of the new loan.

Are seller-paid points deductible?

As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. This deduction previously was reserved only for points actually paid by the buyer.

Are points deductible?

If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only.

You also can deduct any points you pay when you refinance your home, but you must do so proportionally over the life of the loan. Consult your tax or financial advisor.

What is the Mortgage Credit Certificate program?

See >> Your Mortgage - Mortgage Credit Certificate Program.

When is the best time to buy?

See >> Buying Your Home - What Can I Afford: When is the best tome to buy?

How do you choose between buying and renting?

Home ownership offers tax benefits as well as the freedom to make decisions about your home. An advantage of renting is not worrying about maintenance and other financial obligations associated with owning property.

There also are a number of economic considerations. Unlike renters, home owners who secure a fixed-rate loan can lock in their monthly housing costs and make prudent investment plans knowing these expenses will not increase substantially.

Home ownership is a highly leveraged investment (small up front investment controls a large ultimate profit.) that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation.

Mitchell A. Levy in his book, "Home Ownership: The American Myth," Myth Breakers Press, Cupertino, Calif.; 1993 offers an opposing view with which not all experts agree, "For some people, owning a home is a great feeling," writes Levy. "It does, however, have a price. Besides the maintenance headache, the amount of after-tax money paid to the lender is usually greater than the amount of money otherwise paid in rent," Levy concludes.
David T. Schumacher and Erik Page Bucy offer a different opinion for evaluating the risk associated with home ownership in their book "The Buy & Hold Real Estate Strategy," John Wiley & Sons, New York; 1992, "Good property located in growth areas should be regarded as an investment as opposed to a speculation or gamble."
These authors recommend that prospective buyers spend a few months investigating a community. Many people make the mistake of buying in the wrong area. They write, "Just because certain properties are high-priced doesn't necessarily mean they have some inherent advantage. One property may cost more than another today, but will it still be worth more down the line?"

As you can see, homeownership isn't for everybody and sometimes renting can be the more prudent venue. OurValleyHomes' "Rent vs. Buy Calculator" will point you in the right direction in choosing whether you are better off renting or owning your home.

Should I buy a vacation home?