Congress has extended and expanded the first-time home buyer credit in several important respects. The new law will provide financial assistance to baby boomers and retirees who want to downsize to a different home. Let’s discuss a few of the aspects of the credit that will aid in the downsizing process.
2. You do not have to sell your existing home to qualify for the home buyer credit. Although you have to be a “long time resident” of your existing home, claiming a credit under the new law does not obligate you to sell your present home. You can rent it or keep it as a second home. If you choose not sell your present home, don’t overlook the tax consequences of losing the capital gains tax exemption for a home that you no longer occupy principal residence. Right now, to qualify for that exemption, you must have lived in the home for 2 of the past 5 years.
3. You do not have to “upsize” to qualify for the credit. The new home buyer credit for existing homeowners does not mandate that you “move up” in size or price. A pure downsize move to a less expensive home still qualifies. The credit is based on 10% of the new home price, capped at $6500. There is an upper limit, in that your new home purchase cannot exceed $800,000. That shouldn’t be an issue for a typical downsizer!
4. The income limitations have been increased. The original first-time homebuyer credit was available only if your modified adjusted gross income (MAGI) was less than $75,000 or $150,000 for a married couple. The new law raises those limits to $125,00o for singles and $225,000 for couples, at which point the credit begins to phase out. The credit is completely lost at incomes of $145,000 (singles) and $245,000 (couples). MAGI is generally calculated by using your total income and subtracting “above the line” deductions and adjustments.
5. The credit has been extended into 2010. Under the new law, you must close on a new home, or be locked into a purchase contract, before May 1, 2010. The actual closing must take place before July 1, 2010. Note that as with the original home buyer credit, you may have a choice as to when you claim the credit. For example, if you purchase a new home in March 2010, you can claim the credit on your 2009 tax return. Alternatively, if your income is a factor, you can wait until you file your 2010 tax return the following year. The credit remains “refundable” meaning that even if you owe no tax, the IRS will send you a check in the amount of the credit.
For additional information on how the credit works, here is the current IRS Form 5405. I assume that this will be updated soon.
So start strategizing baby boomers. The new homebuyer tax credit may be just want you need to make downsizing a reality.