First-time home buyers purchasing any kind of home – new or resale – are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A limited exception exists for certain contract for deed purchases and installment sale purchases. See the IRS website for more detail. However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010. Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties. In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a downpayment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community. To date, 18 state agencies have announced tax credit assistance programs, and more are expected to follow suit. The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs.
In the event of an IRS inquiry, you’ll need the records that document the interest you paid: -Copies of Form 1098, Mortgage Interest Statement, showing the interest and points you paid this year -Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property -The name, Social Security Number, and address of the person you bought your home from, if you pay your mortgage interest to that person, as well as the amount of interest you paid for the year -Your federal tax return from last year if you refinanced your mortgage last year or earlier and if you’re deducting the eligible portion of your interest over the life of your mortgage. Form 1098 is the statement your lender sends you to let you know how much mortgage interest you paid and, if you purchased your home in the current year, any deductible points you paid. Sometimes, these forms don’t look like tax forms – scan the statement you get in January looking for the words “Form 1098.” If you paid more interest than your Form 1098 shows, you must attach a statement to your tax return that explains why you’re deducting more than your lender reported on Form 1098. For more information on deducting the interest on your home mortgage, refer to “IRS Publication 936: Home Mortgage Interest Deduction.”
If you had a “grandfathered” mortgage and refinanced it, the mortgage balance replaced by the new mortgage remains grandfathered. EXAMPLE: Your principal mortgage balance on October 13, 1987 was $51,000. On April 15, 1989, you borrowed $101,000. You used that money to pay the existing loan (which had a balance of $49,000) and all your credit cards, then used the rest of the loan proceeds to buy a new car. Of the total amount borrowed, $49,000 is “grandfathered” and $52,000 is a home equity loan.
If all your mortgages fit one of more of the following categories, you may deduct all of the interest paid on your mortgages. 1. Mortgages you took out on your main home and/or a second home on or before October 13, 1987 (called “grandfathered” debt, because this covers any mortgages that existed before the laws were changed in 1987). 2. Mortgages you took out after October 13, 1987 to buy, build, or improve your main home and/or second home (called acquisition debt), plus grandfathered debt that totaled $1 million or less throughout 2002 ($500,000 if you are married and filing separately from your spouse). 3. Mortgages you took out after October 13, 1987, other than to buy, build, or improve your main home and/or second home (called home equity debt) that totaled $100,000 or less throughout 2002 ($50,000 if you are married and filing separately from your spouse) and all of the mortgages on the home totaled no more than its fair market value. If a mortgage does not meet these criteria, your interest deduction may be limited. To figure out how much interest you can deduct in that situation, see “IRS Publication 936: Home Mortgage Interest Deduction.”
Yes, if all mortgages on your home total either -More than the fair market value of your home, or -More than $1 million ($500,000 if you’re married and filing separately from your spouse). And yes, if your home equity loans are more than $100,000 ($50,000 if you’re married and filing separately). In those cases, your deduction may be limited. For details, see “IRS Publication 936: Home Mortgage Interest Deduction”.
Here are a few special situations you may encounter. -If you have a second home that you rent out for part of the year, you must use it for more than 14 days, or for more than 10% of the number of days you rented it out at fair market value (whichever number of days is larger) for the home to be considered a second home for tax purposes. If you use the home less than the required number of days, your home is considered a rental property, not a second home. -You may treat a different home as your second home each tax year, provided each home meets the qualifications as your residence. -If you live in a house before your purchase becomes final, any payments you make for that period of time are considered rent. You cannot deduct those payments as interest even if the settlement papers label the payments as interest. -If you used the proceeds of a home loan for business purposes, enter that interest on Schedule C if you are a sole porprietor, and on Schedule E if used to purchase rental property. The interest is attributed to the activity for which the loan proceeds were used. -If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can’t be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible. -If you used the proceeds of a home mortgage to purchase or “carry” securities that produce tax-exempt income (municipal bonds) or to purchase single premium (lump sum) life insurance or annuity contracts, you cannot deduct the mortgage interest. (The term “to carry” means you have borrowed the money to substantially replace other funds used to buy the tax-free investments or insurance).
You do, if you are the primary borrower, you are legally obligated to pay the debt, and you actually make the payments. If you are married and both of you sign for the loan, then both of you are primary borrowers.
For the IRS, a home can be a house, condominium, cooperative, mobile home, boat, recreational vehicle, or similar property that has sleeping, cooking and toilet facilities. Your home mortgage must be secured by your main home or your second home. You can’t deduct interest on a mortgage for a third home, a fourth home, and so on.