Tax Research Center About the Tax Institute Register Press Center

First-time Homebuyer Credit Extended and Liberalized

The Worker, Homeownership, and Business Assistance Act of 2009 (HR 3548) signed into law on November 6, 2009, has extended and made several changes to the first-time homebuyer credit (FTHC).

Overview
The new law:
  1. Extends the FTHC
  2. Makes the FTHC available to higher income taxpayers but adds a limitation on the purchase price of the home
  3. Provides a tax credit for existing homeowners
  4. Includes special provisions for taxpayers in the military
  5. Adds "anti-abuse" measures to prevent erroneous claims
  6. Changes Form 5405
  7. For a quick summary of the changes, view the first-time homebuyer credit comparison chart.

  1. Extension of the FTHC
    The Act extends the FTHC to apply to a principal residence purchased before May 1, 2010. The credit is also available to a taxpayer who enters into a written, binding contract to purchase a principal residence and closes on the purchase before July 1, 2010.

    As with earlier versions of the credit, credit for a qualifying 2010 purchase may be claimed on the taxpayer's 2010 return or on an original or amended 2009 return.

  2. New income and purchase limitations
    For purchases after November 6, 2009, the phase-out range for the credit is increased to modified AGI of $125,000-$145,000 ($225,000-$245,000 for joint filers). However, eligibility for the credit is limited to a home purchase price of $800,000. Important: The $800,000 purchase price is not the beginning of a phase-out range. Homes costing more than this amount do not qualify for the credit.

  3. NEW! Special Rule for Current Homeowners
    Taxpayers who are considered "long-time residents" of the same principal residence are now eligible to claim a credit that is equal to the lesser of a) 10% of the purchase price, or b) $6,500 ($3,250 MFS) of a subsequent principal residence. A long-time resident is one who has owned a home and used it as a principal residence for any 5 consecutive years during the 8-year period preceding the purchase of the subsequent principal residence.

    This provision is effective with homes purchased after November 6, 2009. All other new rules (new phase-out range, purchase price cap, last date available for the credit) apply as well. There is no requirement that the taxpayer sell the first residence-it can be sold, converted to rental property, given as a gift, etc. as long as the taxpayer occupies the subsequent home as a principal residence.
    Example: Taxpayer and spouse purchased a home together in 2000 and used the home as rental property until December 31, 2002. In 2003, the taxpayers moved into the home and began using it as their principal residence until the purchase of a subsequent principal residence in January of 2010. The taxpayers are considered to be long-time residents because they have owned and used the home purchased in 2000 as their principal residence for 5 of the last 8 years preceding the current purchase. Therefore, the taxpayers are allowed to claim the homebuyer credit available to long-term residents (which is 10% of purchase price up to $6,500).

  4. Special provisions for taxpayers in the military
    • For a taxpayer on qualified official extended duty, the FTHC is further extended to a principal residence purchased before May 1, 2011 (July 1, 2011 if the taxpayer enters into a binding contract before May 1, 2011). Qualified official extended duty means duty overseas for at least 90 days after Dec. 31, 2008, and before May 1, 2009,
    • Fifteen-year recapture does not apply for homes purchased before Jan. 1, 2009, if the reason for disposing of the residence is because of qualified official extended duty.

  5. Eligibility for the Credit
    The following provisions have been added to prevent erroneous claims for the FTHC. They are generally effective for homes purchased after Nov. 6, 2009.
    • A taxpayer must be at least 18 years of age on the date of purchase to claim the credit. A taxpayer's spouse is considered to meet the age requirement if one spouse is age 18.
    • A taxpayer who is claimed as a dependent on another taxpayer's return is not eligible for the credit.
    • A taxpayer must attach a properly executed settlement statement (such as a HUD statement) to the tax return in order to claim the FTHC.
    • A home purchased from a party related to the taxpayer or by the taxpayer's spouse is not a qualifying purchase.
    • Increases IRS authority to deny the credit.

  6. NEW! Claiming the Credit – Form 5405
    Taxpayers who purchased a home in 2009 must be aware that the 2009 Form 5405, Homebuyer Credit, cannot be electronically filed. In addition, taxpayers who purchased a home after Nov. 6, 2009, must wait to claim the credit until the IRS has issued the revised Form 5405. Important: Taxpayers who purchased a home on or before Nov. 6 and who choose to claim the credit on an original or amended 2008 return, may continue to use the unrevised version of Form 5405.

    Taxpayers who wish to claim the credit on their 2009 return, may want to consider filing their 2009 return without the homebuyer credit and then amending the return to claim the credit. Of course, taxpayers have the option of claim the credit for a home purchased in 2009 on their 2008 original or amended return.