Frequently Asked Questions

Understanding the Credit

  1. Who is eligible to claim the $7,500 tax credit?
  2. What is the definition of a first-time home buyer?
  3. What types of homes will qualify for the tax credit?
  4. What's the definition of "principal residence"?
  5. Is there an income restriction?
  6. What is "modified adjusted gross income"?
  7. Do individuals with incomes above the $75,000 or $150,000 limits lose all benefits of the credit?
  8. Does the credit amount differ depending on tax filing status?
  9. I am not a U.S. citizen. Can I claim the tax credit?
  10. Does the credit have to be paid back to the government? If so, what are the payback provisions?
  11. Why must the money be repaid?
  12. Because the money must be repaid, isn't the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
  13. If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
  14. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
  15. So there's no way to get any cash flow benefits before I file my 2008 tax return?

Practical Questions

  1. How do I apply for the credit?
  2. So I can't use the credit amount as part of my down payment?
  3. I made an offer on a home that was accepted on March 27, 2008. We went to settlement on April 12, 2008. Do I qualify for the credit (assuming I meet all the other requirements)?
  4. If I don't make an eligible purchase until 2009, do I claim the credit when I file my 2009 tax return in 2010?
  5. My sister and I are both single and want to purchase a home together. Will we each receive a $7,500 credit?
  6. My fiance and I bought a house on June 1, 2008. We'll get married in 2009. I owned a home in 2006. He's never owned a home. Will we get a credit? For 2008? For 2009?
  7. My sister and I wish to purchase a home together. She previously owned a principal residence but sold it two years ago. I've never owned a residence. Can I qualify for a partial credit?
  8. I made an eligible purchase of a principal residence in May 2008. My brother, also a first-time homebuyer, wishes to move in with me next year and purchase a partial interest in the home in before July 1, 2009. Will he qualify for the credit as well?
  9. I'm working outside the U.S. for part of 2008, so part of my income will be excluded from tax. I'm single and want to buy a home when I come back (also in 2008). Can I disregard my nontaxable overseas income when figuring whether I am eligible for the credit?
  10. What is the repayment feature of the credit?
  11. What are the terms for repayment?
  12. When do I make the payment?
  13. Will the IRS put a lien on my property for the amount of the credit repayment?
  14. What if I sell my house before the 15-year repayment period is complete?
  15. What if there's very little gain (or even a loss) on the sale and the proceeds won't cover the repayment amount?
  16. Are there any other exceptions to the repayment rules?
  17. If I received a refund of a portion of the tax credit because my total tax liability was less than the amount of my tax credit do I have to repay the amount of the refund?
  1. Who is eligible to claim the $7,500 tax credit?
    First-time home buyers purchasing any kind of home (new or resale) are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008, and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.
  2. What is the definition of a first-time home buyer?
    The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
  3. What types of homes will qualify for the tax credit?
    Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.
  4. What's the definition of "principal residence"?
    Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling.
  5. Is there an income restriction?
    Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Individuals who file a Joint return may have income of no more than $150,000.
  6. What is "modified adjusted gross income"?
    Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains. To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
  7. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?

    Not always. The credit has a phase-out so that the closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. For this new credit, the credit amount is gradually reduced as an individual's income reaches $95,000 (single return) or $170,000 (joint return). Individuals with income above $95,000 ($170,000 joint return) will receive no tax credit.

    For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

    • Couple's income: $165,000
    • Income limit: $150,000
    • Excess income: $15,000
    The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount. The denominator is $20,000 (specified by the statute). In this example, the disallowed portion of the credit is 75% of $7,500, or $5,625. ($15,000/$20,000 = 75% x $7,500 = $5,625) Stated another way, only 25% of the credit would be allowed. In this example, the allowable credit would be $1,875. (25% x 7,500 = $1,875)
  8. Does the credit amount differ based on tax filing status?
    No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
  9. I am not a U.S. citizen. Can I claim the tax credit?
    Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
  10. Does the credit have to be paid back to the government? If so, what are the payback provisions?
    Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
  11. Why must the money be repaid?
    Congress' intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.
  12. Because the money must be repaid, isn't the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
    Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers more than $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.
  13. If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
    Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
  14. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
    Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
  15. So there's no way to get any cash flow benefits before I file my 2008 tax return?
    Any first-time home buyers who believe they would be eligible for all or part of the credit may wish to modify their income tax withholding (through their employers) or to adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

Practical Questions

  1. How do I apply for the credit?
    There is no pre-purchase authorization, application or similar approval process. Eligible purchasers will simply claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise. In many, if not most cases, the IRS will be on notice that a purchase has occurred because the settlement officer at the time of purchase is required to report the transaction.
  2. So I can't use the credit amount as part of my down payment?
    Presently, there is no mechanism available for claiming the credit any earlier than the 2008 tax return that will be filed in 2009. Congress tried to devise a mechanism that would allow pre-funding of the credit, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.
  3. I made an offer on a home that was accepted on March 27, 2008. We went to settlement on April 12, 2008. Do I qualify for the credit (assuming I meet all the other requirements)?
    Yes. A home is considered as "purchased" when all events have occurred that transfer the title from the seller to the new purchaser. If a property goes to settlement on or after April 9, 2008, then an otherwise qualified buyer would be eligible for the credit. Similarly, closings must occur before July 1, 2009, for purchases to be eligible for the credit.
  4. If I don't make an eligible purchase until 2009, do I claim the credit when I file my 2009 tax return in 2010?
    You'll have a choice. Qualified first-time home buyers who make their purchase between Jan. 1, 2009, and before July 1, 2009, are permitted to make an election to treat the purchase as if it had occurred on Dec. 31, 2008. This election allows them (depending on the timing of the sale) to claim the credit on their 2008 tax return that is due on April 15, 2009. They may also elect to file their 2008 tax return after April 15 by filing for an automatic extension and claim the credit on the extended 2008 return. If they file their 2008 return before they have purchased the home, they may utilize this election and file an amended 2008 tax return. Of course they will always have the option of claiming the credit for the 2009 purchase on their 2009 return filed in 2010.
  5. My sister and I are both single and want to purchase a home together. Will we each receive a $7,500 credit?
    No. The purchase of a residence will generate a tax credit amount that will total up to no more than $7,500, no matter how many unmarried purchasers are buying the house.
  6. My fiance and I bought a house on June 1, 2008. We'll get married in 2009. I owned a home in 2006. He's never owned a home. Will we get a credit? For 2008? For 2009?
    It's pretty clear that you will not qualify for the credit for the 2008 purchase because you owned a home after June 1, 2005 (three years before the date of purchase). But since you and your fiance were single when you made the purchase, he may qualify for the credit since he didn't own a home after June 1, 2005. If he's otherwise eligible, then he may be able to take the credit because you'll both file your tax return as Single for 2008. If you got married in 2008, neither of you could claim the credit. When purchasers file a joint tax return (as you would if you got married in 2008), both must be first-time home buyers. Your 2009 marriage isn't relevant for this purpose.
  7. My sister and I wish to purchase a home together. She previously owned a principal residence but sold it two years ago. I've never owned a residence. Can I qualify for a partial credit?
    Possibly. The statute is somewhat ambiguous. Note though, that Treasury will no doubt provide guidance to clarify this ambiguity. As it presently stands, the statute specifically provides that for a married couple to be eligible for the credit, both must be first-time home buyers. Similarly, the statute provides that if a married couple files their tax return as Married Filing Separate, then the credit is limited to $3,750 each. By contrast, the statute directs the IRS to determine how the credit can be shared when two or more unrelated individuals purchase a home. In that case, the statute does not specify whether all the unrelated purchasers must be first-time home buyers. You'll want to check with a tax advisor.
  8. I made an eligible purchase of a principal residence in May 2008. My brother, also a first-time homebuyer, wishes to move in with me next year and purchase a partial interest in the home in before July 1, 2009. Will he qualify for the credit as well?
    No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time home buyer. If you, as the first-time home buyer, had bought the property from, for example, your grandparents, you would also be disqualified from using the credit.
  9. I'm working outside the U.S. for part of 2008, so part of my income will be excluded from tax. I'm single and want to buy a home when I come back (also in 2008). Can I disregard my nontaxable overseas income when figuring whether I am eligible for the credit?
    No. To determine whether you are eligible for the tax credit, you are required to combine your nontaxable overseas income with any U.S. income you earn in 2008. Thus, for example, if you are single and had $45,000 of non-taxable overseas income and $55,000 of U.S. income, you would be ineligible for the tax credit because your 2008 income ($100,000) exceeded even the $95,000 phase-out amount. If you had $45,000 of non-taxable overseas income and $40,000 U.S. income, you would qualify for a partial credit because your total income of $80,000 would be within the phase-out amount. If you had $45,000 non-taxable overseas income and $20,000 U.S. income, you would qualify for the full credit (assuming you met all of the other requirements) because your income was less than $75,000. Similar rules would apply if you had non-taxable overseas income in 2009 and wished to purchase then.
  10. What is the repayment feature of the credit?
    The repayment feature of the credit is similar to a recapture provision: in some circumstances the tax system takes back all or part of a tax benefit. In this case, there is no precedent for repayment of a tax credit created for individuals, so not much is known about how the repayment will occur, how it will be reflected at settlement (or on sales forms) or how the IRS will collect and enforce the payments. The repayment is the equivalent of converting the tax credit into an interest-free loan.
  11. What are the terms for repayment?
    The credit amount is repaid in increments of 6.67% of the credit amount over 15 years. For individuals who take the full $7,500 credit, the repayment will be about $502.50 a year. Individuals who claim a credit of less than $7,500 will also have a 15-year repayment period and will pay 6.67% of their credit each year. For example, an individual who claims a credit of $6,000 will repay $400.20 a year ($6,000 x .0667). There is no interest charge applied to outstanding balances.
  12. When do I make the payment?
    The mechanics are not specified. Repayments for credits claimed on 2008 tax returns will go into effect for the 2010 tax year. As a practical matter, then, repayments of credits taken in 2008 will not actually start until 2010 returns are filed in 2011. Repayments for credits claimed on 2009 returns will go into effect for the 2011 tax year and reflected on 2011 returns filed in 2012.
  13. Will the IRS put a lien on my property for the amount of the credit repayment?
    The statute does not grant the IRS that authority. The rules for tax liens are quite specific about when the IRS can put a lien on property. It is not yet known how the IRS will identify and stake its claim to the repayment.
  14. What if I sell my house before the 15-year repayment period is complete?
    When the person who used the credit sells the home, any amount of tax credit that has not been repaid will be due in the year of sale. For example, if an individual still "owed" $4,000 in repayments and realized $25,000 of proceeds from the sale, the $25,000 of seller proceeds would be reduced to $21,000 and $4,000 will be remitted to the IRS. Again, the mechanics are unknown.
  15. What if there's very little gain (or even a loss) on the sale and the proceeds won't cover the repayment amount?
    If the gain on the sale is less than the amount that must be repaid, part of the liability is forgiven. For example, if the individual still "owed" $4,000 but the gain on the sale was only $3,500, then the seller would not be required to repay the IRS the $500 shortfall. If there was no gain or even a loss, then the remaining $4,000 would not be repaid.
  16. Are there any other exceptions to the repayment rules?
    Yes. If the person who utilized the credit dies before the full credit amount has been repaid, then any balance that remains unpaid is disregarded. Special rules make adjustments for people who sell homes as part of a divorce before the credit has been fully repaid. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency).
  17. If I received a refund of a portion of the tax credit because my total tax liability was less than the amount of my tax credit do I have to repay the amount of the refund?
    Yes. You would have received the maximum economic benefit of the any credit amount when you reduced your tax to zero and also received a refund of the balance. Thus, you would repay the full amount of the credit for which you were eligible. Again, there are no details that specify the mechanics for tracking those amounts.

Sources: The National Association of Realtors and the National Association of Home Builders