First-Time Homebuyer Credit

The Worker, Homeownership and Business Assistance Act of 2009, signed into law on November 6, 2009, extended and expanded the first-time homebuyer credit allowed by previous Acts.

Under the new law, an eligible taxpayer will qualify for an $8,000 credit if they buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. A $6,500 credit is available to homebuyers that have lived in their house for five years and purchase a new residence. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

If you’re a first-time homebuyer that settled on a new home on or before November 6, 2009, here is some general information.

2008 Home Purchases

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

2009 Home Purchases

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before December 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. [Added November 12, 2009]

For a home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase.

First-time homebuyers who purchase a home in 2009 can claim the credit on either a 2008 tax return, due April 15, 2009, or a 2009 tax return, due April 15, 2010 (see Filing Requirement information below). The credit may not be claimed before the closing date.

General Information

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer's principal residence.
• Reduces a taxpayer's tax bill or increases the refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed. 

IRS Filing Requirements

Federal legislative changes in November 2009 expanded and extended the first-time homebuyer credit and also added documentation requirements for claiming the credit. Due to increased compliance checks by the IRS, failure to submit documentation will slow down the issuance of any applicable refund.

2009 Tax Return

Because of the documentation requirements for claiming the credit, taxpayers who claim the credit on their 2009 tax return must file a paper — not electronic — return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with one of the following:  

• For purchasers of conventional homes, a copy of Form HUD-1, Settlement Statement, or other settlement statement, showing all parties' names and signatures, property address, sales price and date of purchase.
• For purchasers of mobile homes who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

The new legislation also extended the credit to long-time residents of the same main home if they purchase a new main home. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive year period during the eight-year period ending on the purchase date of the new home. For long-time residents claiming the credit, the IRS recommends attaching, in addition to the documents described above, any of the following documentation of the five-consecutive year period:  

• Form 1098, Mortgage Interest Statement or substitute mortgage interest statements;
• Property tax records; or
• Homeowner’s insurance records.

2008 Tax Return

It’s possible to claim the homebuyer credit for 2009 home purchases on 2008 tax returns. Homebuyers can use the December 2009 revision of the Form 5405 along with Form 1040X to amend their 2008 tax return.