Realtors Address Home Buyer Tax Credit

EDISON — With the home buyer tax credit expiration date less than 85 days away, the New Jersey Association of REALTORS® (NJAR®) and its approximately 50,000 members are helping buyers understand the “tax terms” and “legalese” of the federal home buyer tax credits, available to first-time and repeat buyers who enter into a “binding” contract by April 30, 2010.
“Most people have heard of the home buyer tax credits, but there are various details that are not as well-known that could mean the difference between a credit of $8,000, $6,500 or nothing for some potential home buyers interested in taking advantage of the opportunity,” said NJAR® 2010 President Judy Appleby.
A free webinar, open to the public, will be held on tomorrow from 4 p.m. to 5 p.m. Pre-registration is preferred and can be completed at www. REALstoryNJ.com/home-buyer-tax-credit-webinar. Featuring a presentation from Linda Goold, tax counsel for the National Association of Realtors®, the webinar will outline specific scenarios for eligibility and will address one-on-one questions from participants who log in to the session. The webinar will shed some light on specific nuances of the most recent tax credit extension.
The Worker, Homeownership and Business Assistance Act of 2009 offered a new $6,500 tax credit to current homeowners on the purchase of a new primary residence. However, the law does not require sale of the current home. Therefore in aspiring to “trade-up,” a family does not necessarily have to give up the fond memories of the former residence. It can be retained for investment, vacation or other purpose. However, the newly purchased home must be the “principal” residence in which the family lives “most of the time” according to the Internal Revenue Service (IRS).
What is a “binding” contract anyway?
The term “binding” does not simply mean a signed offer. A fully executed contract requires signed approval from both the buying and selling parties. Unique to New Jersey, the “attorney review period,” allows both parties to have an attorney study the contract.
Appleby added, “The safest scenario is to allow as much time as possible for approval of the contract. If a question arises during attorney review that cannot be resolved, the entire transaction may fall through. If that occurs near the April 30th “binding contract” deadline, it will be difficult to begin the home search process again with enough time to obtain a tax credit.”
Sale price limit includes closing costs
It is known that the property to be purchased must be located within the United States and it cannot cost more than $800,000. According to the IRS instructions for form 5045, “The purchase price is the adjusted basis of your home on the date you purchased it. This includes certain settle-ment or closing costs (such as legal fees and recording fees) and your down payment and debt to purchase the home (such as a first or second mortgage or notes you gave the seller in payment for the home).”
Adding closing costs to the sale price can be an important factor in an expensive state like New Jersey with a vast inventory of homes available close to the $800,000 limit.
Claim instructions require more documentation. Taxpayers claiming the home buyer credits must file the IRS forms manually. They cannot be filed electronically. The IRS has revised Form 5405 for taxpayers to claim the homebuyer tax credit. Documents, such as the HUD-1, must now be included to verify settlement date.
For the repeat buyer tax credit, the IRS recommends including statements to verify the length of ownership, such as records regarding mortgage interest, homeowners’ insurance or property taxes. These documents must show that it was the principal residence for at least five consecutive years of the previous eight.
Home buyers do not necessarily need to wait to claim the credit. Buyers who close in 2010 can claim the property settlement on their 2009 tax returns.
Another aspect of the extended tax credit law is an increased income limit. The income limits to qualify for the full credit are $125,000 for a single person and $225,000 for a married couple. Individuals earning up to $145,000 and married couples earning up to $245,000 are eligible for partial credit. Many potential buyers may not be aware of their eligibility for either credit.
The tax credits that are available now are up to $8,000 for a first home purchase, which applies to those who have either never owned a home or have not owned a home for the last three years. The repeat buyer credit is up to $6,500 for current homeowners who have lived in their home for five of the last eight years. In order to claim either credit, the home buyer(s) must be in a binding contract before April 30, 2010 and close on the home before June 30, 2010.