Tax Benefits of Purchasing a Home in 2009
By: Kelly Newman, Tax Associate, Porter Keadle Moore, LLP
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Federal First-Time Homebuyer Tax Credit
With low real estate prices and large tax credits available, now is the perfect time to purchase a home. The American Recovery and Reinvestment Act of 2009, signed into law by President Obama on February 17, 2009, increased the first-time homebuyer credit to the lesser of $8,000 or 10 percent of the purchase price for homes purchased after December 31, 2008 and before December 1, 2009. Prior to this Act, the first-time homebuyer credit was $7,500 and was subject to repayment after three years (over 15 years).
Unlike the old credit, the $8,000 credit does not have to be paid back unless the home is sold within 36 months of purchase. If the home is sold within this time frame, some of the credit will be required to be repaid. The credit begins to phase out for individual taxpayers with adjusted gross income (AGI) excess of $75,000; $150,000 for those taxpayers married filing jointly.
For purposes of this credit, a “first time homebuyer” is a buyer that has not owned a principal residence during the three-year period prior to the purchase. The $8,000 federal first-time homebuyer tax credit is a refundable credit – a dollar for dollar reduction in tax. This means that the credit can be claimed even if the taxpayer has little or no tax due on their tax return. The credit will offset any tax due (if any), and the remainder will be refunded to the taxpayer. The taxpayer may claim the tax credit once closing is complete. It is important to make sure that closing occurs by November 30, 2009. The tax credit can be claimed on the homebuyer’s 2009 tax return, or to receive a quicker refund, the taxpayer may amend his or her 2008 tax return. The taxpayer must fill out IRS Form 5405 to receive the credit.
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Georgia Homebuyer Tax Credit
The Georgia homebuyer tax credit was signed into law on May 11, 2009 by Governor Sonny Perdue. The amount of the credit is equal to the lesser of $1,800 or 1.2 percent of the purchase price. Unlike the federal tax credit, the Georgia credit is not limited to first-time homebuyers. In addition, there are no income limits. The credit is available to buyers of single family residences who close between June 1 and November 30 of 2009.
In order for a purchase to qualify for the credit, (1) the residence must have been for sale prior to May 11, 2009, or (2) the owner’s acquisition debt must have been in default on or before March 1, 2009 or the property must have been foreclosed on or held by the bank or mortgage company. The homebuyer may claim one-third of the credit available in each of the next three tax years, and may carry forward unclaimed amounts. Unlike the federal tax credit, taxpayers may not amend their 2008 Georgia tax return to immediately receive the credit. The credit must be applied to 2009 and subsequent tax years. Also unlike the federal credit, there is not a limit to how long the buyer must own the property.
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Additional Items to Consider
In addition to the first-time homebuyer tax credit, there are other tax advantages to home ownership. Taxpayers that itemize their deductions are able to deduct their mortgage interest paid, as long as their mortgage amount is less than $1 million. For most homeowners, the bulk of their mortgage checks go towards interest, so this is a large tax deduction. In addition, property taxes paid for the current tax year are tax deductible. Lastly, when you sell your home, up to $250,000 in sales gain ($500,000 for married joint filers) is tax-free, as long as the homeowner owned the property for two years and lived in it for two of the five years prior to the sale.
There are many tax benefits to purchasing a home, particularly with the current tax credits available. Remember that you must close on your home by November 30, 2009 to qualify, so if you plan to take advantage of these credits you should begin the home-buying process as soon as possible!
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Kelly Newman is a certified public accountant and tax professional at Porter Keadle Moore, LLP, a regional CPA firm located in Atlanta, GA. Kelly can be reached at knewman@pkm.com.