Are you a first-time homebuyer? Good news, there are some excellent tax benefits for you!
You should know about a tax credit that puts more money in your pocket. The first-time homebuyer tax credit currently provides a refundable credit equal to 10% of the purchase price. The maximum tax credit is $8,000.
In 2021, President Biden and the 117th Congress submitted H.R. 2863-First-Time Homebuyer Act of 2021, which increases the tax credit to $15,000. Congress referred the bill to the House Ways and Means Committee, where it still sits.
Read on to learn more about:
According to the IRS, a first-time homebuyer is a person (with your spouse) who has not owned any other principal residence for three years prior to purchasing the new principal residence for which the credit is being claimed.
A principal residence is the dwelling where you and your spouse live most of the calendar year. You can only have one principal residence at any one time.
You can either be a first-time homebuyer or a long-term resident and still qualify to get the tax credit. As a long-term resident, you are entitled to receive up to $6,500 in credit for purchasing a new principal residence.
First-time homebuyers are subject to gross income requirements.
The income requirements to qualify are different for single and joint filers. The IRS looks at your modified adjusted income (MAGI) for this credit. Your MAGI is your adjusted gross income plus exempt or excluded income and certain deductions.
MAGI limitations for the first-time homebuyer tax credit are:
Several situations can arise in which you are ineligible for the first-time homebuyer tax credit. First and foremost, if you exceed the MAGI limitations, you will not qualify for the tax credit. That’s not ideal, but you should know about the myriad of tax deductions available to you as a real estate investor.
Check out our expert and informative articles on taxes to see what strategies you have available.
Another reason the tax credit would not apply is if you purchased a home outside of the United States. In addition, you cannot sell the house or have the home stop being your principal residence in the year you bought it. That means you cannot use this tax credit to help you flip a house.
If you received your home as a gift or inheritance, you cannot claim this tax credit.
There are some situations where you will have to pay back this tax credit. For instance, suppose you decided to purchase a home and qualify for the credit. If you choose to sell the house within 36 months of the purchase date, you will have to pay back the credit.
Perhaps you buy this home as your residence but decide to convert the home to a business or rental property. That means the house is no longer your principal residence. Since the home is no longer your principal residence, you will have to repay the credit.
If you cannot keep up with the payments on the home and it goes into foreclosure, you will have to repay the credit.
You will have to include the credit amount as an additional tax on your tax return to repay the credit.
In some situations, when you lose the home, you will not have to pay back the tax credit.
For instance, suppose an act of God or some other disaster destroys your home. You do not have to pay back the credit if you purchase a new principal residence within two years of the home’s destruction.
Suppose the government finds your house unfit to be lived in and condemns it. No one is allowed to live on the property because of the safety hazards. In the instance of condemnation and your subsequent property abandonment, you don’t have to pay back the tax credit provided you purchase a new principal residence within two years of the condemnation.
Maybe you get a divorce and lose the house to your now former spouse, the person who receives the home is on the hook for the tax credit.
As it currently stands, first-time homebuyers can earn up to an $8,000 credit to purchase their principal residence. Long-term residents can also qualify for a more minor $6,500 credit if they buy a new principal residence.
The income limitations are $125,000 for single filers and $225,000 for joint filers. There are some situations where you will either not qualify or have to pay back the credit. Overwhelmingly those situations involve selling or losing the house.
Taxes can be complicated, but they don’t have to be. To learn more about powerful tax savings strategies that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time we speak.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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