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What You Need to Know About the Housing Credit

First-time homebuyers tax credit explainedThe Homebuyer Assistance and Improvement Act of 2010, signed into law by President Obama in July 2010, modified the terms of the existing first-time homebuyer's credit. The new law extended the closing deadline for home purchases from June 30, 2010, to Sept. 30, 2010; binding contracts for the sale of the home must have been entered into by April 30, 2010.

For purposes of the credit, a first-time homebuyer is defined as someone who has not owned a principal residence during the last three years. For married taxpayers, you have to consider the history of both the homebuyer and the homebuyer's spouse. If one spouse is disqualified, neither can claim the credit. This means, so long as you are considered married (even if you weren't married to your spouse for the entirety of the past three years), you don't qualify for the first-time homebuyer credit if your spouse doesn't qualify.

The same rule doesn't apply for unmarried individuals who purchase a home together. The law allows those taxpayers to split the credit or allocate the amount to any buyer who qualifies as a first-time buyer. See Notice 2009-12 for more details.

The credit is equal to 10% of the home's purchase price up to a maximum of $8,000. A taxpayer who purchased a home for $75,000 would be entitled to 10%, or $7,500. A taxpayer who purchased a home for $80,000 would be entitled to the maximum credit, or $8,000. But a taxpayer who purchased a home for more, say, $150,000, would still only be entitled to the maximum credit, or $8,000.For purposes of the credit, a home refers to your principal residence -- meaning where you intend to live -- and includes new construction as well as homes for resale. A home could be a house, condo, manufactured or mobile home; however, if you purchased your home from a close relative, the credit will be disallowed. If you previously purchased a vacation home or rental real estate that was not used as a principal residence, you can still take advantage of the credit.

For sales made in 2010, income and phaseout restrictions apply, with single taxpayers maxing out at $125,000 and married filing jointly couples topping out at $225,000 in order to qualify for the full tax credit.

Existing homeowners may also apply for the credit. Longtime homeowners who bought a replacement home in early 2010 may qualify for a credit. To qualify, a homeowner must have owned and used the same home as a principal residence for at least five consecutive of the last eight years. The credit is 10% of the purchase price up to a maximum of $6,500. Income limits and other restrictions still apply.

The first-time homebuyer credit was created in 2008 under The Housing and Economic Recovery Act of 2008, as the equivalent of a no-interest loan worth up to $7,500 that must be repaid in 15 equal, annual installments. The first installment is due with your 2010 income tax return.

Unlike the 2008 credit, the 2010 credit does not automatically have to be repaid. However, if the home ceases to be your principal residence within 36 months from the date of purchase, the full amount of the credit received becomes due. Exceptions apply for special circumstances, such as divorce.

The credit is refundable, which means eligible taxpayers can take the maximum credit even if the taxpayer has little or no federal income tax liability. If your total credits exceed your tax liability, you may receive a refund.

To claim the credit, you need to submit a form 1040, along with a federal form 5405. Be sure to keep a copy of your settlement sheet with your tax records. You must attach a copy of your settlement sheet, such as a HUD-1, to your return; if you don't attach a copy of your settlement sheet, the credit may not be allowed. If you can't provide a settlement sheet, you'll need to attach a signed copy of your sales contract.

This is the last year for which you can claim the first-time homebuyer's credit -- after a three year run, the credit was not renewed under the new tax act.

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