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When you buy, own and sell a home, you may be eligible for tax benefits that can make home ownership one of the most profitable investments you make. Read below for full information on the tax benefits of home ownership or access a Mortgage Tax Saving Calculator here.

The Extended & Expanded 2009 Home Buyers Tax Credit

It's official. President Obama has signed a bill that extends the tax credit for home buyers into the first half of 2010. The original program had been scheduled to expire on November 30, 2009.

In addition to extending the tax credit of up to $8,000 through June 30, 2010, the extension measure also opens up opportunities for others who are not buying a home for the first time.

The program that has existed for First-Time Home Buyers remains intact with the one exception that more people are now eligible based on an increase in the amount of income someone may now earn.

Additionally, the program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

The amount of income someone can earn and qualify for the full amount of the credit has been increased: single tax filers who earn up to $125,000 are eligible for the total credit amount and those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible.

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.


Frequently Asked Questions About the 2009 Home Buyers Tax Credit

Question: Existing homeowner credit: Must the new house cost more than the old house?
Answer: No. Thus, for example, individuals who move from a high cost area to a lower cost area who
meet all eligibility requirements will qualify for the $6500 credit.

Question: I am an existing homeowner. On October 25, 2009, I signed a contract to purchase a new home. I have lived in my current home for more than 5 consecutive years and am within the new income limits. I will go to settlement on November 20. If President Obama has signed the bill by the time I go to settlement, will I qualify for
the new $6500 tax credit?
Answer: Yes. The existing homeowner credit goes into effect for purchases after the date of enactment (when the bill is signed). There is no reference to the date of contract for the new credit. The provision looks solely to the date of purchase, which is generally the date of settlement.

Question: I am a first-time homebuyer but was not within the prior income limits at the time I entered into my contract to purchase on October 30, 2009. I will be covered, however, by the new income limits. If the new rules have been signed into law by the time I go to settlement, will I be eligible for a credit?
Answer: Yes. The new income limitations go into effect as soon as the President has signed the bill. The income limit and other eligibility rules will look to your status as of the date of purchase, which is the settlement date. So if the new rules have been signed when you go to settlement, you should be eligible for the credit (or a portion of the credit if you're within the phaseout range).

Question: I am an eligible existing homeowner. I have a fair amount of equity in my home. I have found a home with a nonnegotiable price of $825,000. Will I be able to use any of the $6500 tax credit?
Answer: No. The $800,000 cap on the cost of the purchased home is firm at $800,000. Any amount above $800,000 makes the home ineligible for any portion of the credit. The $800,000 is an absolute ceiling.

Question: I owned my home for 10 years, but sold it two years ago year and have been renting since. If I purchase a home, will I be eligible for the $6500 tax credit if I meet all theother eligibility tests?
Answer: Yes. Because you lived in the home for more than 5 consecutive years of the previous 8, you will qualify for the $6500 credit. For example, Say John and his wife bought a home in 2000 and lived there until 2008 when he got a divorce. Whether John has been renting or bought in the interim, he WOULD INDEED be eligible for the credit because he owned a home and occupied it as his principal residence for 5 consecutive years out of the last 8 years. The keyword here is "consecutive." As long as he lived in that house for 5 years straight what he did since 3 years doesn't impact eligibility.

Question: I am an eligible first-time homebuyer. I entered into a contract to purchase on November 1, 2009. Do I have to go to closing before December 1? How does the extension date affect me?
Answer: You do not have to close before December 1. Once the legislation has been signed, it will be as if the Nov 30 date had never existed. Therefore, so long as the contract settles before April 30 (or July 1, worst case), the purchaser will be eligible for the credit.

The Purchase

  • The IRS says you can deduct interest in the year that it is paid, and that is usually part of each monthly loan payment.
  • In addition, if the day you purchase is on any day other than the first of the month, you will likely pay a charge for "daily interest" between the day of closing and the end of the month. (Line 901 of your HUD settlement statement)
  • In most cases, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. (Lines 801 and 802 of your settlement statement) This is a particularly unusual deduction because you get the benefit even if the seller paid your closing costs.

Mortgage Interest

  • You can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up. (If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in.)
  • In addition, you can always deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose.
  • One purpose may be "debt-shifting." For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you bought a house, obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible. Furthermore, the rate on the home equity loan is likely to be around prime plus one or two, usually much lower than credit card rates. This works with any personal debt, from car loans to consolidation loans - with only one hitch. The home equity loan means your house is collateral for the loan. If you fail to pay the payments as agreed, your house could go to foreclosure.

The Sale

  • If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that house and pay no federal income tax whatsoever. (That's assuming you are married - singles get up to $250,000 tax free.)
  • You can do this as often as every two years for the rest of your life. Buy a fixer-upper in an up and coming neighborhood, work on it nights and weekends for two years, then sell it at a nice profit and pocket the cash, totally free of federal taxes.
  • Most states recognize the federal exclusion, so you put the cash away totally tax free. You don't have to re-invest, you don't have to be age 55, and you can do this every two years forever.
  • The one restriction is that you MUST own and occupy the house as your principal residence, so don't try this on a rental property by pretending you live there when you don't.
  • Many of these benefits came into being with the 1997 tax law, but lots of folks are just finding out about them now, so buy and sell to your heart's content.