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President Obama signed the American Recovery and Reinvestment Act of 2009 into law last week.  Of note to potential home buyers and current home owners was Section 1006, which granted an “Extension of and Increase in First-Time Homebuyer Credit” as well as a Waiver of the requirement to Repay.  Here are the details:

• The previous tax credit was given to those that purchased their first home up until July 1st, 2009.  The new extension of the tax credit replaces that date with December 1st, 2009
• The previous tax credit was $7,500.00.  The new tax credit is $8,000.00
• The previous tax credit was essentially a $7,500 loan from the government to be repaid over time.  The new tax credit is does not require that you repay (with some exceptions…generally if you sell your home within a 3 year period from purchase).
• The effective date of this tax credit is December 31st, 2008.

To get more information on the original bill that the American Recovery and Reinvestment Act of 2009 revised, we’ve linked to a previous post of ours that explains the details of the old $7,500 tax credit

If you have any questions on the $8,000 tax credit and how it impacts you as a home buyer, don’t hesitate to ask.

Related Posts:

Your $7500 Tax Rebate | H.R. 3221, the “Housing and Economic Recovery Act of 2008″ | Why You Should Care Series – Post 2

UPDATE (2/24/09): Revisions have been made to this bill with the American Recovery and Reinvestment Act of 2009.  After reading about this bill, read about the changes made here.

In this second post of our H.R. 3221, the “Housing and Economic Recovery Act of 2008″ Series, we talk about a provision included that allows most first time home-buyers to receive at $7500.00 tax rebate.  Make sure you read all the way through as there are some caveats and a TWIST.  Here are the details you need to know:

• The $7500 Tax Credit is available to firs-time home buyers that purchase a principal residence sometime after April 9th of 2008 and sometime before July 1st of 2009.
• The Credit is a “refundable” credit.  So, if you have a tax liability of $2000 next year and qualify for the full $7500 credit, you would be hypothetically entitled to a $5500 refund!
• A first-time home buyer is classified as someone who has not had an ownership interest in a property within the past 3 years.
• There are income restrictions on the tax credit, so if you make more than $75,000 filing single or$150,000 filing jointly, you may not be eligable for the tax credit (I haven’t found a good description of the calculations used to phase-out the credit…let me know if anyone knows them and I’ll post it here).

• The tax credit is tied to the price of the home you purchase.  It will be 10% of the purchase price of the home with a maximum of $7500.  For example, if you purchase a home for only $50,000,then the credit you could receive would be $5000…but a purchase price of $160,000 would max out at $7500.

BUT WAIT….THERE’S A CATCH!

Unlike most other tax credits, this tax incentive must be paid back.  All eligible purchasers who claim the
credit will be required to repay it over 15 years.  The statute specifies that the repayment amount will
be 6.67% of the credit amount each year.  Thus, a buyer who qualifies for the full $7500 credit will repay
$502.50 each year.  There will be no interest charge on outstanding balances.

When the person who used the credit sells the home, any amount of tax credit that has not been repaid
will be due in the year of sale.  For example, if an individual still “owed” $4000 in repayments and
realized $25,000 of proceeds from the sale, the $25,000 of seller proceeds would be reduced to $21,000
and $4000 will be remitted to the IRS.

If the gain on the sale is less than the amount that must be repaid, part of the liability is forgiven.  For
example, if the individual still “owed” $4000 but the gain on the sale was only $3500, then the seller
would not be required to repay the IRS the $500 shortfall.  If there was no gain or even a loss, then the
remaining $4000 would not be repaid.

All in all, I’m in favor of this provision in the bill.  It gives first-time home buyers a great incentive to purchase a home over the next year, and allows them to basically “borrow” up to $7500 from the government and pay it back with the equity they gain in their home…with no repercussions if they gain no equity by the time they sell.  I’m sure there are a bunch of questions, so feel free to fill up the comments section or shoot us over an email.

Tomorrow we’ll be talking about some of the changes to the FHA program the bill brought about.

Your $8000 Tax Credit | What Home Buyers Need to know about the American Recovery and Reinvestment Act of 2009

H.R. 3221, the “Housing and Economic Recovery Act of 2008″ Why You Should Care Series – Post 1

First-Time Home Buying in 2008: 5 Reasons Why Now is a Good Time To Buy

Search the MLS for your first home here!

NAR President-Elect Charles McMillan sits down with NAR Chief Lobbyist Jerry Giovaniello to discuss the importance of the Housing Stimulus legislation currently pending on Capitol Hill.

With the constant barrage of negative media surrounding real estate these days, it’s no wonder that newlyweds and other first-time home buyers are putting their dreams of buying their first home on hold. But 2008 promises to be as good a time as any to buy your first home and here’s why:

It’s a buyer’s market

With foreclosures adding houses to a market already hungry for buyers and economists predicting that residential housing sales and prices will not pick up until 2009, sellers who need to sell are lowering prices and often throwing in additional incentives.

Perfect timing is rarely achieved

Although you should educate yourself and use caution when buying into a declining market, a buyer waiting for prices to hit absolute bottom, usually waits too long and then pays the cost of buying into a rising market with increased home prices. If you’re planning on staying put for a while, now is a great time to buy your first home because the market will eventually balance itself and turn once again to a seller’s market and when it does, your home’s value will increase too.

Interest rates are low

Recent Federal Reserve decisions have lowered interest rates yet again making the Federal funds rate drop to 2.25% (down from 5.25% a year ago) and the prime rate drop to 5.25%. And today a Bankrate.com index showed that the national overnight average for a 30-year, fixed-rate mortgage is being offered at 5.74% and a 15-year fixed at 5.09%, both of which are buyer-friendly rates.

Labor and materials are readily available

Even if you don’t qualify for enough financing to buy the home of your dreams due to tightening lending practices, it’s easier than ever to fix-up and maintain properties with the number of home improvement stores, tips, do it yourself classes and handymen readily available. And because new construction has slowed down in most markets and all trades that depend on it are eager for employment, buyers are likely to get better work, done faster and maybe a little cheaper in 2008 than at anytime in the future.

A need to sell makes sellers flexible

Remember, sellers who don’t need to sell right now generally don’t have their properties for sale. And those who do need to sell tend to be more flexible in negotiations, so buyers should consider proposing terms that ask sellers to help make the deal work beyond just lowering their price. Sellers may have the ability to finance part of the purchase price to make it easier on the buyer, they may be able to fix or replace something that needs updating, and they can always pay more than the customary share of closing costs and taxes.

Happy House Hunting!!

There’s really no sure way to avoid an audit. Most audited tax returns are selected for review either because the filer is part of a target group or because a computer program selects the return. The computer selects many returns randomly, but there are red flags that will draw the IRS’s attention.

The key is to minimize your exposure. Here are some suggestions from MSN Money on things you should try to avoid:

1. Math mistakes

The biggest reason people receive letters from the IRS is addition or subtraction goofs. Fortunately, math errors rarely lead to a full audit. Still, double-check your math before you send in your return.

And if you receive a letter from the IRS that says you owe them, check your numbers first. Sometimes, the IRS misreads one of your numbers, or the number is keyed incorrectly into the IRS computer. If it’s wrong, send a letter with a printout of your calculations.

2. Mismatched interest and dividend reporting

If the amounts reported in supporting documents don’t match the amounts on your return, you will get a letter.

There are lots of possible errors here. Sometimes, the IRS will enter the Form 1099 information into its computer and erroneously keystroke the income amount or the Social Security number of the recipient. If the income isn’t yours, get a letter from the bank or other payer and forward that letter to the IRS. If the amount is incorrect, send a copy of the Form 1099 mailed to you by the payer.

3. You’re on the IRS hit list

Those who receive much of their income in cash are traditionally on the radar screen of IRS agents looking for unreported income. Recently, the IRS has also pinpointed small-business owners and the self-employed in its bid to find more of the estimated $345 billion in uncollected taxes.

4. You’ve got a big mouth

Never brag about how you put one over on the IRS. Internal Revenue Service informers can earn a reward of between 15% and 20% of the additional tax collected, including fines and penalties and interest. Whistleblowers can file Form 211 or call the IRS hotline at 1-800-829-0433. Everyone else: Zip it, and keep your accounting strategies to yourself.

5. You’re exceptional

An IRS computer program compares your deductions to others in your income bracket and weighs the differences. This secret IRS formula, called the “DIF Score,” is used to select returns with the highest probability of generating additional audit revenue.

The IRS is coming
If you are facing an audit, don’t panic. An audit is merely a process where the IRS asks you to substantiate the numbers on your tax return. Here are some survival strategies:

Call your tax professional. Or get one. If the audit is simple – to prove your charitable and interest deductions, for example – you can do it yourself by mailing in copies of your substantiation. For all in-person audits, I strongly suggest professional representation.

Plan your taxes to preempt an audit. If, say, you have a huge medical deduction that you feel would increase your chances of being audited, attach copies of your medical bills to your return. The IRS computer will still kick out your return, but when a real person looks at it, the reviewer will recognize that you know the rules. This may actually reduce your odds of a full audit.

Keep records for three years. The IRS can audit you for three years after you file your return. In reality, however, most returns are audited within 18 months. This gives the IRS time to do the review and request the appropriate substantiation before the statute of limitations (usually the three-year period) ends.

Once the deadline has passed, the IRS normally cannot audit your return and your expenses are insulated from examination.

File at the last minute if you are concerned about a potential audit. It won’t hurt and might decrease your chances of being selected. The good news is, if you are audited one year with a refund or no change, it decreases your odds of being audited in subsequent years. In fact, if you are audited on the same items two years in a row with no additional taxes due, the IRS manual specifically recommends that they not audit you on the same items for a third year. Full Story

U.S foreclosure filings continued their upward climb in December, rising 97% from the previous year and 7% from the month before. Total foreclosures rose 75% in all of 2007.

According to MSN Real Estate’s latest report, hardest-hit markets were along both coasts, which experienced a more severe boom and bust in the latest cycle, as well as areas hard hit by auto-industry layoffs such as Michigan and Indiana.

The surge in foreclosures is expected to continue at this same pace until after the next wave of risky loans resets in the middle of 2008.

2007 foreclosure filings by state

Owning a home tops the dream list for most Americans, and for plenty of good reasons. It’s a shelter for your family, a gathering place for your friends and a good long-term investment.

Tax breaks are also frequently cited as motivation for moving from renting to owning, and there are many ways a home can cut your tax bill.

But, as is often the case with the U.S. tax code, homeownership tax benefits are not always clear-cut. That frequently leads to some bad information floating around.

While myths, half-truths and misconceptions may abound, Bankrate.com has narrowed it down to five that, if you buy into them, could cost you.

1. My mortgage interest will reduce my tax bill.
This is true for the majority of homeowners, but not for all. And this tax break won’t work forever.

To take tax advantage of your home loan’s interest, you must itemize and come up with a total that exceeds your standard amount. On 2007 tax returns, the standard deductions are $5,350 for single taxpayers, $7,850 for head of household filers and $10,700 for married couples who file jointly. These amounts increase a bit each year to account for inflation.

“Given home prices these days, most owners are itemizing,” says Mark Luscombe, principal tax analyst with CCH of Riverwoods, Ill. By the time they count mortgage interest, property taxes and other nonhome deductions, such as state taxes and charitable gifts, their itemized totals easily surpass their allowable standard deductions.

But most is not all.

Taxpayers who buy a home late in the year, for instance, might find the standard deduction is more beneficial, at least initially, says Kathy Tollaksen, a CPA at Sikich in Aurora, Ill. In these cases, where you make only a few payments in a tax year, depending on your loan you might not pay much interest, at least not enough to exceed standard amounts.

Timing also could reduce or eliminate other home-related tax breaks.

“Quite a few states have real-estate taxes that are calculated in arrears. That is, they have already been paid or mostly paid (by the seller) by the time you buy,” says Tollaksen. “In the first year, you’re seeing taxes that are someone else’s responsibility so you’re not getting the full tax value of your real-estate taxes.”

The benefit of mortgage interest also could be a myth if you’ve lived in your home for a long time. In this case, you likely are paying more toward your loan’s principal instead of interest. So homeowners at the end of a loan term don’t get much, if any, from this tax break.

Or, as Bob D. Scharin, senior tax analyst and editor of Warren, Gorham & Lamont/RIA’s monthly tax journal “Practical Tax Strategies,” puts it, “Every deductible expense you incur may not produce a deduction.”

2. All costs related to my home are deductible.
There are no two ways about this one. It’s flat-out false.

“Some buyers think, hope, they can write off everything connected with the house,” says Tollaksen. “Not so. Association fees and property-insurance costs are not deductible.”

Neither, in most cases, is private mortgage insurance, which your lender probably required if your down payment was less than 20%. However, a new law changes the deductibility of PMI for mortgages originated or refinanced between Jan. 1, 2007, and Dec. 31, 2009.

If you got your mortgage and policy in that time frame, you might be able to deduct your insurance-premium payments. The law also extends beyond private insurance to others, including FHA, VA and rural housing.

There are some limits, though. The PMI deduction is phased out for taxpayers with adjusted gross incomes exceeding $100,000 and is totally eliminated once adjusted gross income reaches $110,000.

Don’t try to deduct basic maintenance, repair or home-improvement costs either.

Tollaksen says, “I’ve had people say, ‘I put a new roof on my home; can I deduct that?’ No.”

If you try to write off these expenses, expect to hear from the Internal Revenue Service and to pay a higher tax bill (and possible penalties and interest) after you refigure your taxes without the disallowed deductions.

However, you still need to keep track of these expenses.

“If you convert the home to rental property or sell it,” she says, “these costs will affect the property’s tax basis.”

A home’s basis is critical when it comes time to sell. And selling is also a tax area in which many people fall for myth No. 3.

3. I must use money from my home sale to buy another residence.
This used to be the only way to get around a tax bill on a home sale. Even then, you were only able to defer taxes by purchasing a new residence of equal or greater value with the profits from your other house. When you sold your final house, you’d owe those long-deferred taxes you had rolled over throughout the years. Home sellers age 55 or older were allowed a once-in-a-lifetime tax exemption of up to $125,000 in sale profit.

But on May 7, 1997, home-sale tax law changed. Still, a decade later, many homeowners are confused about the tax implications of selling.

“I recently heard some neighbors talking about having to buy another house when they sell to avoid the taxes,” says Scharin. “If the last time you sold the house was before 1997, you’re thinking of those old rules.”

Don’t worry. Most taxpayers still get a nice break. Now, if you live in the house for two of the five years before you sell, the IRS won’t collect tax on sale profit of up to $250,000 if you’re single or $500,000 if you and your spouse file a joint return.

“The law change has really affected people’s behavior,” says Luscombe. “Before, it didn’t really matter much whether you sold frequently or held onto your home for a long term. You basically could roll over the gain into a larger home and people could avoid tax until they sold for the final time without putting it into a replacement home.

“Now the law rewards people who sell frequently. In this current market, people who sell every couple of years can get and keep their gain,” Luscombe says. “But people who buy and hold might find they have reached the point where the gain exceeds the exclusion.”

That means they face unexpectedly high tax bills, even at the lower 15% capital-gains rate. The profit could also push them into a higher overall tax bracket, meaning they would make too much to claim some deductions, credits or exemptions. They also might even end up owing alternative minimum tax.

Another problematic consequence, says Luscombe, is that when the new rules took effect, people basically quit keeping records related to their homes.

“They thought: Since we’re never going to be taxed on the sale, there’s no need to keep track of what we paid and what improvements we made,” he says. The improvements add to your home’s basis, which you subtract from the sale price to determine your profit and whether any of it is taxable.

“Now with inflation in the housing market, a lot of people are selling homes in excess of the gains without any way to show that their tax bill should be less,” says Luscombe.

4. Putting my child on my home’s title is a smart tax move.
Worries about taxes on a residence sometimes lead homeowners to fall for this myth. It’s a particularly tricky one, because it combines confusion about residential taxes with the even more complex estate-tax area.

“Sometimes we’ll hear about taxpayers who, in doing some quick back-of-the-envelope estate planning, decide to put their home in the children’s names,” says Tollaksen. “The thinking is: My son or daughter won’t have to worry about this when I die.”

The goals: Avoid probate, keep the home in the family and get the property out of the parent’s estate for those tax purposes. Such a move, however, could produce other tax problems for your children.

Unless the child moves into the newly deeded house with the parent and lives there long enough (two of the previous five years) to make the house the child’s main residence, too, says Tollaksen, the son or daughter won’t get the $250,000 or $500,000 residential tax break when the child later decides to sell. Without establishing primary residency in the house, either before or after the parent passes away, the child’s ownership is viewed as an investment property.

Other parents opt to simply add a child’s name along with theirs on the title to the house, known legally as a joint tenancy. It doesn’t mean that all the owners live in the home, but simply that two or more people hold title to the property.

This, too, can produce tax complications.

Generally, when someone inherits a property, its value is stepped up. That means when the owner dies, the property becomes worth its fair market value that day.

But if the child co-owns the property with his parent, the child doesn’t get to fully use stepped-up basis. Tax law considers the addition of the child’s name to the title as a gift. And, along with that half of the home, the child receives half the basis that his or her parent has in the property.

This is known as the property’s carry-over basis. And it could be costly.

Consider, for example, that you bought your house many years ago and your basis in the property is $50,000. You add your daughter to the title. When you die, she inherits your half of the home, which by then is worth $250,000. A buyer offers $300,000 for the home.

Pretty good deal, right? From a real-estate perspective, yes. But not when it comes to your daughter’s tax bill on the sale.

Rather than owing taxes on just $50,000 more than the house’s stepped-up market value, your daughter will owe on three times that amount. Here’s the math:

What had been done with the best parental intention turned out to carry a big price because of this homeownership tax myth.

5. If I take a capital loss when I sell my home, I can write it off.
This myth, like No. 2, was probably started by wishful homeowners. Sorry, it’s just as wrong.

It is true that real estate, like any other asset, has the potential to go down as well as up in value. But unlike most of those other holdings, you cannot write off any loss you suffer if you must sell your main residence for less than what you paid.

That’s because your residence, under tax law, is considered personal property.

“When you sell your home for a loss, it’s not like other capital items,” says Scharin. “You don’t get to deduct personal property that you sell for a loss.”

“It’s the same as any personal property that declines in value,” says Luscombe, “like that old TV you sold to the neighbor kid so he could take it to college. You sold it for much less than you paid, but you can’t take a loss.”

You do, however, have to pay tax on gains you make when selling personal property.

But at least you now know the difference between fact and fiction when it comes to your residential property, which will help you make appropriate real-estate and tax decisions in the future. Full Story

Every parent of young children has an unwanted-toy graveyard somewhere in the home. Today’s prized playthings inevitably become tomorrow’s cast-offs, ready to be given away, discarded or boxed up in the garage. According to the folks at Springwise however, the alternative, offered by Texas start-up Babyplays, is to receive four to six toys by mail each month. Parents can keep the toys as long as they like, and send them back to receive a fresh batch. Monthly subscription rates range from $36.99 to $64.99.

Babyplays offers a range of age-appropriate toys, and depending on their membership level, parents can rent up to 10 toys a month. Besides reducing clutter, members can save money by renting instead of owning. You could call it the Netflix rental model applied to toys. We’ve seen start-ups tweak the rent-not-buy concept in innovative ways: a German company, Lütte-Leihen, sends parents a fresh batch of baby clothes that can be exchanged for new ones each month and the same model has been applied to women’s accessories, with companies like Bag, Borrow or Steal offering members access to designer handbags and jewellery.

A factor all of these firms must reckon with is the need to acquire an adequate inventory of items to accommodate customer whims—a potentially expensive proposition. That said, the rental model still has plenty of new potential applications. What’s key is that many consumers are becoming less interested in full ownership, opting instead for the convenience and flexibility of renting or fractional ownership.