Top 4 Questions About the Tax Credit

1) Can a buyer use their tax credit in any way towards the purchase of a home or will they receive it next year after filing their taxes???

There is not a program right now that allows a buyer to get their Tax Credit upfront before they purchase a home. However, after they close, they can go to the IRS link below and complete the 5405 Form. Buyers will need to mail the completed 5405 Form to the IRS office in Austin, Texas along with a copy of their executed HUD-1. It typically takes 45-60 days to obtain the Tax Credit once the 5405 and HUD-1 has been sent to the IRS. IF a buyer purchases by June 30, 2010 (with an executed contract by April 30, 2010) and they qualify for the Tax Credit, they can file it with their 2009 Tax Return. IF the buyer has already filed their 2009 Tax Return, they are able to file an amendment to that Tax Return until 10/15/2010.

Form 5405

Here are some ideas on how buyers can obtain their funds up front to close:

A) FHA allows a buyer to borrow their funds to close from an immediate relative (i.e., parents, siblings)- and then they can pay them back once they get their Tax Credit check in from the IRS. We need to document the monies coming into the bank account and specific guidelines apply.

B) FHA allows the money to also be a gift from a blood relative. Again, we will need to document the funds and specific guidelines apply.

C) Another way to obtain funds to close would be to borrow it against a collateralized loan (for example, a vehicle that is paid for and a loan obtained against it). The buyer must qualify for the additional monthly payment (and specific documentation required). Other examples of collateralized loans would be borrowing it against a current home (if they are a Move Up/Repeat Borrower), CDs, Boats, etc. The buyer could also pay back the collateralized loan when they receive the Tax Credit if they wish.

D) Buyers can borrow against their 401K, if applicable. Lenders are not required to count against the ratios the amount that they borrowed against their 401K. Specific documentation required.

E) Buyers can sell personal items (i.e., vehicles, scuba diving equipment, etc) in order to obtain funds to close. Specific documentation required.

2) Is the (up to) $8000 a Tax Credit or Tax Deduction and What is the difference?

Tax Credits are direct reductions in the amount of tax that is owed based on the tax bracket and the adjusted gross income to the IRS. Tax credits are up to a dollar for dollar reduction of the taxes is owed on the tax return. So, if a First Time Home Buyer purchases a home in 2010 before June 30 (with a contract executed by 4/30/2010) and no money is owed currently to the IRS, the full Tax Credit can be obtained in a refund (i.e., a check) from the IRS. See above for explanation of when to file.

Tax Deductions reduce the amount of your income that is taxable by the IRS or your state. In other words, if you were looking at a $1000 tax deduction and you were in the 15% tax bracket (you do not make a whole lot of money per year) your taxable income would be reduced by $250. So if you had an annual salary of $20,000 your taxable income with this $1000 tax deduction would be $19,750.

The (up to ) $8000 First Time Home Buyer and the (up to ) $6500 Repeat/ Move Up is a Tax Credit.

3) Can you give me a quick explanation of both Tax Credits?
Sure- here goes:

FEATURE December 1 2009- April 30,2010
Rules as enacted November 2009
First Time Buyer –
Amount of Credit Up to $8000 (10% of Sales Price up to a max of $8000)

First Time Buyer-
Definition for Eligibility
Have not owned a property as a primary residence for the last 36 months
Current Homeowner –
Amount of Credit Up to $6500 (10% of Sales Price up to a max of $6500)

Current Homeowner –
Definition for Eligibility
Must have lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the replacement home is purchased. The Move Up/Repeat Buyer does not have to sell their current home but will need to qualify for both house payments (in most cases)
Time frame Contracts must be executed by April 30, 2010 and closed/funded by June 30, 2010.

Income Limits $125,000 – single
$225,000 – married
Additional $20,000 phase out

4) Do you think that the Tax Credits will be extended?
That is the Million (s) Dollar Question. The arguments would be with the certainty of interest rates increasing in the next few months, the Tax Credit will be extended so that there is not a lull in home buying. The other side of the argument is that it has been extended once already and the Feds would like to see what happens in our industry without this “crutch”…. i.e., can it stand on its own without Fed intervention. Time will tell but in the mean time… let’s get the word out.

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