As we move further into tax season, Treasury and IRS employees have been busy filling in the missing pieces on all of the new tax laws that were passed as part of the recent stimulus package.
When it comes to real estate, the rules are at best confusing. Let’s shed a little compact fluorescent light on the subject:
2008 $7,500 tax credit vs. 2009 $8,000 tax credit.
If you were a first-time buyer who purchased a home after April 8, 2008 through the end of 2008, you might have realized that you could get a $7,500 tax credit on your 2008 tax return. This is a tax credit, which means that even if you don’t pay $7,500 in taxes you’d still get that much in the way of a refund, provided you meet other qualifying details, according to Mark Luscombe, principal analyst for the tax and accounting group at CCH.
As of mid-February 2009, the 2008 $7,500 tax credit had to be paid back in $500 equal installments over 15 years, which meant that this tax credit effectively functioned as a zero-interest loan. (Luscombe said the fine print in the new law says that if the taxpayer died, the rest of the payback is forgiven. It was unclear whether both homeowners have to die if the property is owned jointly, or just one of the homeowners.)
On Feb. 25, the IRS revised the 2008 tax credit to increase it to $8,000 and to not require repayment. The IRS issued new guidance and revised Form 5405 that stated that the purchaser will be entitled to receive the entire $8,000 tax credit even if it is filed on his or her 2008 tax return. Luscombe said in a follow up email that the IRS “determined that this was what Congress intended even if that was not the way the law was written.”
With this revision, it doesn’t matter if you chose to close on December 31, 2008 rather than January 2, 2009 (perhaps to be able to itemize the interest and points on your 2008 tax return).
But there are some wrinkles that require you pay attention. To qualify for the $8,000 tax credit, you must earn less than $150,000 in adjusted gross income for couples filing jointly. Also, you must stay in the house (assuming as your primary residence) for three years or Luscombe says there may be some payback requirement. (He’s unclear how the IRS would be able to follow up and some of the regulations and filing requirements aren’t fully explained at the moment.)
The $8,000 first-time buyer credit is only good for homes purchased by first-time buyers (or anyone who hasn’t owned a home in the last 3 years) from January 1, 2009 through December 1, 2009 – so don’t wait to close in December or you’ll miss out.
Going Green? Take a Tax Credit
The stimulus package eased requirements on energy tax credits. The $500 lifetime tax credit for building improvements has been increased to $1,500 for such improvements as the installation of energy-efficient windows, insulation, doors, and mechanical systems.
In addition, you can take a 30 percent tax credit for every dollar you spend on things like solar heaters, fuel cells, and heat pumps, Luscombe explained. The individual limits on particular expenditures has mostly been eliminated.
Foreclosure and Short Sale Forgiveness
For those who are going through foreclosure or a short sale, where the house is selling for less than the amount owed on the mortgage, the forgiven debt will not be taxed as income through 2012.
“Up to $2 million of mortgage debt on the principal residence that has been forgiven can be excluded from income,” Luscombe explained. “Taxpayers do not have to put it on their tax form,” even if the lender has sent a 1099.
Jan. 19, 2009.
I qualified for the $7500 credit but lost my house to a short sale because of Chinese drywall and we had to move out cause it was making my family sick. Do I still have to re-pay the $7500 loan back?