How It Works For You

For more than two years now we have been hearing about, and dealing with, the problems that resulted from too many loans being made to people that couldn’t afford them and shouldn’t have been given credit to buy new homes. The bursting of the housing bubble also blew a big whole in the global economy, deflating the demand for new home construction dramatically. Homebuilding is down over 50% since the peak in 2007. The forces of market correction have done what needed to be done.

Yet, often forgotten by the media is the fact that the financial meltdown also damaged those who weren’t borrowing too much or using their homes as ATM’s. Moreover, the loss of confidence that followed discouraged a lot of potential homebuyers who had worked hard, saved and were ready for that first home or “move up” buy.

As part of the measures taken to right the nation’s economic ship was a tax credit program aimed at giving an incentive to those ready to buy, and qualified to borrow, that last push back into the market. The First Time Homebuyer’s Credit provided an $8,000 tax credit for people who didn’t own a home previously. The credit was to ease the fears of those waiting on the sidelines until prices bottomed (which no one could really predict), and helped make that first purchase more affordable in the first year or two, when most first time buyers feel the most stress in making the mortgage payment each month.

It took a while for most people to understand the program, even though it was uncharacteristically simple for a government program, and even realtors struggled to make buyers grasp the benefits. Of course, the overall economic environment felt a bit like the end of the world through spring of 2009. But the real problem seemed to be getting the word out that the program offered a credit, not a deduction, on the first-time buyer’s income taxes.
The difference between the two is pretty significant. While an $8,000 deduction would certainly reduce your taxes, a tax credit could potentially eliminate your taxes. That puts money back in your pocket, making it available for a down payment or making a slightly larger monthly payment more comfortable.

“It’s interesting to note, the last cyclical peak of first-time home buyers was during the last noteworthy economic downturn ...”

As an example, a married couple filing jointly with a taxable income of $56,000 would have paid $7,569 in federal taxes in 2009. An $8,000 deduction would have reduced their taxes to $6,369, saving $1,200. The First Time Homebuyer’s program was a credit, however, so that in the example above, the couple would have eliminated their entire tax burden and received a $431 bonus to boot. That’s a big relief to the new buyer in their first year of home ownership.

Once the panic of the winter faded and people began to grasp the details of the tax credit the buyers began to emerge. As summer drew out it became clear that the program was working, and by years end the impact of the tax credit was one of the factors boosting the recovery of the housing market, and the economy in general.

At a November 13, 2009 realtors conference in San Diego, the National Association of Realtors unveiled their 2009 Profile of Home Buyers and Sellers, an extensive national survey of the demographics of the marketplace. The number of first-time home buyers rose to 47 percent of all home sales compared to 41 percent of transactions in the 2008 study, and was the highest on record dating back to 1981. The previous high was 44 percent in 1991.

Paul Bishop, NAR vice president of research, said several factors have been at play. “Tax incentives, record high affordability conditions and a pent-up demand brought a record share of first-time home buyers into the market,” he said. “These buyers are critical to housing and a general economic recovery because the market always heals from the bottom up – they absorb inventory, free existing owners to make a trade and stimulate related goods
and services.”

“It’s interesting to note, the last cyclical peak of first-time home buyers was during the last noteworthy economic downturn, with first-time buyers starting the chain reaction that led the nation out of the recession,” Bishop said.

Only the passage of the next few years will tell if the rise of first-time buyers presaged the next recovery cycle, but homebuilders and realtors alike felt the benefits of such a surge. Beginning in the fall of 2009, there was a rapid grass roots movement to extend the credit into 2010 to capitalize on the positive economic momentum and the first declines in unemployment. The residential professionals were persuasive enough to move the Obama administration to create the Worker, Homeownership and Business Assistance Act of 2009, which was passed by Congress and signed into law on November 6.

Besides extending the first-time buyer’s credit into 2010, the Act also expanded the tax credit to include a smaller, but significant tax credit of $6,500 for repeat buyers.

The highlights of the extended first-time buyer credit program include:

The $8,000 tax credit is for first-time homebuyers only. For the tax credit program, the IRS defines a first-time homebuyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
• The tax credit does not have to be repaid unless the home is sold or ceases to be used as the buyer’s principal residence within three years after the initial purchase.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The tax credit applies only to homes priced at $800,000 or less.
• The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will also qualify.
• For homes purchased on or after January 1, 2009 and on or before November 6, 2009, the income limits are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
For homes purchased after November 6, 2009 and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

The highlights of the move-up/repeat buyer credit program are essentially the same except for
a couple of provisions:

• To be eligible to claim the tax credit, buyers must have owned and lived in their previous home for five consecutive years out of the last eight years.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500.
• Following are key points that prospective home buyers should be aware of when considering a home purchase under the tax credit program.
• Expanded tax credit benefits apply to members of the military, the foreign service and the intelligence community.
• Home purchases in 2010 may be claimed on an amended 2009 income tax return.
Persons who are claimed as dependents by a taxpayer or who are under age 18 do not qualify for a tax credit.
Home purchases from relatives of the taxpayer or the taxpayer’s spouse do not qualify for the tax credit. The IRS defines relatives as ancestors (parent, grandparent, etc.), lineal descendants (child, grandchildren, etc.) and spouses.
• Married couples are not eligible to claim the first-time homebuyer tax credit if either spouse has previously owned a home. They may, however, qualify for the repeat homebuyer tax credit.
• Taxpayers must submit a copy of the HUD-1 settlement statement and IRS Form 5405 to claim either the first-time homebuyer tax credit or the repeat homebuyer tax credit.

but if the November 2009 sales figures are any indication, the tax credit will make a difference.

According to NAR’s survey, the median income of the first time buyer in 2009 was $61,000. No so coincidentally, the tax due on a $61,000 income was just over $8,000 for 2009, without the benefit of any other deductions. Exemptions or deductions of just over $2,000 for the median buyer would have reduced his or her tax to below $8,000. The tax credit meant that half the first time buyers in 2009 (the number below the median) paid no federal income tax for the year.

How effective the extension will be will be known at mid-year, but if the November 2009 sales figures are any indication, the tax credit will make a difference. The provisions of the tax credit in 2009 made it nearly impossible to complete a sale made after the end of October and still qualify for the credit. New home sales, which had been slowly climbing for seven months prior, dropped more than 16% in November. This reaction, perhaps more than any persuasion by the real estate industry, must have weighed heavily on the collective mind of the administration as they considered an extension.

The chief aim of the first time buyer’s tax credit was to help get the potential buyers off the sidelines, reducing the resistance to buying and reducing the inventory of unsold homes. It was effective enough that record numbers of first time buyers helped existing homeowners move their homes, allowing those that wanted to move up. The expansion of the credit to repeat buyers is designed to reduce the resistance at the next level.

That’s how a recovery proceeds. NH