The Two-Minute Warning

Photo Credit: smh.com.au

Photo Credit: smh.com.au

Hard to believe, but only two months remain before the November 30th deadline for earning the First Time Home Buyers Tax Credit. While that may still seem like quite a ways off, if you’re planning to join the 1.4 million American families who have already taken advantage of this popular incentive—but have yet to zero-in on a property—you may very well find yourself in a sprint to get your purchase in under the wire.  This is not the sort of last-minute shopping that can be crammed into the few waning days before the cut-off date.

Even though the term First Time Home Buyer has been broadly interpreted to empower more people to qualify for the credit, if you truly are a first-time buyer you may not be fully aware of the time it takes to complete a real estate transaction.  At this late date, you will ideally want to have your home picked out by early-October in order to close on it by mid-November; with an extra cushion of time left over to deal with any last-minute details.

Once you’ve found the right home, your work has just begun.  In order for mortgage funds to be available at the time of closing, you must obtain a satisfactory credit report, a competent home appraisal, a commitment for home insurance, a complete home inspection and verification of personal data.  Add to this the fact that you will not be alone in trying to accomplish all these musts as the deadline begins to loom large.  Realtors, lenders, title companies, home inspectors and certified appraisers will no doubt be swamped by the last minute rush; in much the same way as car dealers were bombarded with buyers and a blizzard of paperwork as the Cash for Clunkers automotive incentive program entered its final days.

If you are uncertain whether you qualify for the tax credit, here are the basics; with more details available online at irs.gov:

Who qualifies for the tax credit? First time buyers purchasing a primary residence are eligible, as is any legal U.S. resident who has not owned a primary home for three years prior to the purchase date.  Even if you own a vacation property—but have not used it as your primary residence—you may be eligible for the tax credit to purchase a primary residence.  After the purchase, you must use the home as a primary residence for at least three years; or repay the full tax credit.

What do you mean by “primary” residence? A primary residence is the home in which you spend most of your time.  It can be a single-family detached home, condominium or town home.  Secondary homes and rental properties do not qualify for the credit.

What is the amount of the tax credit? The credit is for 10 percent of the cost of the home, up to a maximum of $8,000.

Are there income restrictions? Yes; based on the purchaser’s tax filing status.  Individuals who file as “single’ on Form 1040 are eligible for the credit if their adjusted gross income is no more than $75,000. Married couples filing jointly may not have income in excess of $150,000.  There are some exceptions to these income requirements.  Please visit irs.gov to check your individual circumstances.

Are there restrictions on the location of the property? Yes.  The property must be located in the United States.

Are there any other restrictions? Yes.  The property cannot be purchased from a close relative, including the taxpayer’s spouse, parent, grandparent, child or grandchild.  Taxpayers who are non-resident aliens are not eligible.

What is the difference between this and the prior tax credit? Unlike the prior tax credit—which was structured like a 15-year interest-free loan—this is a true tax credit because the money is not required to be paid back unless the home is sold within three years.

How do I apply for the tax credit? There is no application or approval process.  Eligible home buyers will claim the credit on the appropriate IRS Form 1040 tax return and/or any special forms the IRS might devise. The credit either reduces your tax bill or increases your refund. This means the credit will be paid to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

There is a serious move afoot to extend the credit beyond its current deadline; but no guarantee it will succeed.  Opposition in Congress is pushing back hard against those who argue that an extension will continue to underwrite a recovery in the housing market.  Further, the tax credit was originally intended as a stopgap to protect wary buyers against additional sharp declines in home prices.  Most market watchers now believe prices have hit bottom and are beginning to recover; making such a protection no longer necessary.

In view of the very real possibility that the tax credit will not be renewed, there’s no time like the present to purchase a home.  Though on the rebound, prices are still among the lowest in a decade, interest rates continue to hover at historic lows; and the selection of homes—though narrowing considerably with each passing month—still offers an acceptable array of choices.

Beware of falling head-over-heals for a “short sale” property.  Such transactions typically take many months to complete—at best—offering virtually no hope of closing by the end of November.  Instead, focus on finding conventional re-sales or foreclosures that offer the fewest impediments to a trouble-free closing.  Sellers hoping to attract one of these last minute buyers should price their homes as aggressively as possible.

westbrookdalThe two-minute warning has sounded.  Time is running out; but there’s still enough on the clock to allow a major victory if your offense moves the ball down the field right away.

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  1. The Two-Minute Warning | Michael Saunders Real Estate Blog :: Online Tax Experts

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