Hidden Gems of the Home Buyer Tax Credit for First-Time Home Buyers and Long-time Homeowners

We’ve talked to a lot of real estate agents since we started this site, and we’re finding that people still haven’t figured out some of the most interesting aspects of the Home Buyer Tax Credit.  In putting together HomeBuyerTaxCredit.com, particularly in working through the myriad complications in the Eligibility Test, we found some hidden gems in the Home Buyer Tax Credit that most real estate agents and buyers have not yet identified.

Here are five of them:

1.  You can take the tax credit on a 2010 purchase if your income qualifies for 2009 or 2010.

This is the biggest misunderstanding about the tax credit: if you are otherwise eligible, you can claim the credit if your income is within the guidelines either for 2009 or 2010.  Most people, including agents, think that buyers have to qualify based on their 2010 income, OR their 2009 income.  Indeed, it’s both.  Think about the implications of that.  It means that a buyer who had a bad year in 2009 (like a lot of people) might qualify under the income guidelines for their 2009 income.  Those people, if they otherwise qualify and close by June 30th, they can take the credit on their 2009 taxes, even if they expect to make too much in 2010.  All they need to do is get an extension of the April 15, 2010 filing deadline, or just file and then later file an amended return after their closing.

2.  You could have been in contract before November and still qualify.

We think a lot of real estate agents have clients who could claim the tax credit and not know it.  The current version of the home buyer tax credit was put into effect on November 6, 2009, and covers closings between November 7, 2009 and June 30, 2010 (so long as buyers are in contract by April 30, 2010).  So a lot of buyers who got into contract prior to November 6th without even thinking they could claim a tax credit might be eligible.  We can certainly see situations where someone did not qualify for the first-time home buyer tax credit at the time of contract because their income was too high for the tax credit in effect at the time, who are now eligible under the higher income limits. Similarly, home buyers who owned their own home would not qualify as first-time home buyers, but now might unwittingly qualify as long-time homeowners eligible for the “step-up” credit.  If I were an agent, I’d be calling all my in-contract buyers just to make sure they know about the new credit, and find out whether they qualify.

3.  You don’t have to literally be a first-time home buyer.

To qualify as a first-time home buyer, you don’t literally have to be a first-time home buyer.  You might have owned a home in the past, so long as you didn’t own your own home within the past three years prior to closing. So if you owned a home before, but sold it at least three years prior to June 30, 2010, you could qualify as a first-time home buyer and claim the tax credit.

4.  You don’t have to live in your house now to be a long time homeowner

A lot of people think that you have to be a CURRENT homeowner to be a long-time homeowner. Indeed, when we looked at the home buyer tax credit sections for all the large national franchise chains, half of them had it wrong.  In fact, you not need to be a current homeowner to qualify as a long-time homeowner.  But you do have to have owned your own home for five consecutive years out of the last eight. Congress wrote this section specifically for people who might not be homeowners now, so that they could take advantage of the tax credit if they had to sell their prior residence out of economic distress.

5.  You don’t have to sell your home to get the home buyer tax credit.

Similarly, a lot of people think that you have to sell your current home to get the long-time homeowner credit. You do not.  The IRS only requires that you have owned your home for five consecutive years out of the last eight.  It does not require that you sell it.  This is actually the foundation for our point that you can use the home buyer tax credit to get your start in investing, since you could buy a new home and rent out your current home.  Remember, though, that you absolutely have to make your new home your residence for three years, or you’ll have to pay the entire credit back.

If you’re interested in the tax credit, you can take (even if you’re not a real estate agent), the Certification Quiz that we have here on the blog, which gives you 20 questions that can test your knowledge of the program.  Over 300 people have taken it so far.