How often do you receive free money from the Government that you do not have to pay back? Most likely, never. A rare exception: 2009 tax credit for First-time Homebuyers – or FTH credit, for short. Here is the crux of it: anyone who becomes a first-time homeowner in 2009 can receive (and usually keep!) as much as $8,000 of cash from the IRS.
If you are looking to buy your own home for the first time – it is obviously exciting news. However…
1. Why is it great news for investors?
No, there is no tax credit for buying an investment property. But think not about buying – think about selling!
Do you have a house that you cannot sell in today’s market – only because your potential buyers can’t qualify for a loan? Why don’t you sell this house using owner financing? Most likely, because you do not want somebody move into your freshly rehabbed property, mess it up and leave – forcing you to repossess and then pay thousands of dollars, out of your pocket, to restore the house back to habitable.
This would not be a concern if your buyers came up with a large down payment, right? But, as you discovered, they don’t have the cash. Now they do!
As long as you find buyers who have not owned a home previously (like your existing tenants, for example!) – they can receive this new windfall credit from the IRS and use it as a down payment – to pay YOU! How is that for an economic stimulus?
2. How does it work?
Basically, it’s a simple two-step process: first, buy a house before December 1st, 2009 and then request the money as a credit on your IRS tax return. And you do not have to wait a year until you file your 2009 tax return – the credit is available right now, on your 2008 tax return, even though you’re buying in 2009.
If your 2008 taxes are not yet done – you will need to attach form 5405 “First-Time Homebuyer Credit” to your tax return. If, for example, your “normal” tax refund is $500 and you qualify for the maximum $8,000 FTH credit – you will receive $500 plus $8,000, for the total of $8,500. If, on the other hand, you owe the IRS $1,000 – then your $8,000 credit will cover your shortage, and you will still receive the remaining $7,000 in cash. It is really that simple.
3. What if I already filed my 2008 taxes?
No big deal. You simply need to file an “amended” 2008 tax return (form 1040X) with the same form 5405. Form 1040X is not too hard to complete, but it is very different from the “normal” tax return – so you may want to hire professional help if you get confused.
The only problem with filing this amended return is waiting. Original tax return can be filed electronically – known as e-file. It takes less than two weeks to get a refund. However, amended returns must be mailed in, and typical processing time is about two months. Make sure to plan for this unavoidable delay.
4. Can this money be used as a down payment at closing?
No. Not at closing. The trick is that, to receive the credit, you need to buy first. Yes, it is a typical catch-22: you need the money to buy the house, but you need to buy the house to get the money. With conventional financing, this is a tough setup.
However for you, the investor, it is great news! This is where you come in and offer your owner financing. Of course, you’ll need to be creative with this arrangement. Since your buyer cannot receive his IRS money until AFTER you sign the documents – you need to find a secure way to get your down payment out of him.
I can think of two solutions. The safe one is to make your buyer borrow his down payment for a rather short time and then pay the debt once he gets the IRS check. He may be able to borrow from friends, family or even credit cards. If he later gambles away his IRS credit and does not pay his debt – at least, this will not be your problem.
If short-term borrowing is not an option for your buyer, then you may consider accepting his down payment at a later day, possibly with a post-dated check. You are running a risk that he may spend his FTH money before it gets to you – so you must protect yourself. If you’re selling to your tenant – you may want to delay transferring title. If you’re selling to a stranger – you may want to delay possession of the property. Please check with your real estate lawyer; the risk is too great to ignore it.
5. Who exactly is a “first-time homebuyer”?
You would think that the term is self-explanatory. Think again! This is a government-created term, so it could not be that simple.
Fortunately, it is better than it sounds. It does not mean “first time EVER.” It means – first time within the last three years. Specifically, neither the buyer nor his spouse (if married) are allowed to own a personal home at any time within the last 3 years. Both must be renters. Owned a home more than three years ago? No problem.
6. How much is the credit?
It is 10% of the purchase price, but no more than $8,000. So, for practical purposes, it is $8,000 – unless you file your taxes as “married filing separately”, and then it’s cut in half.
Beware that the credit is phased out for “high income” taxpayers. In the esteemed opinion of the IRS, $75,000 for a single person or $150,000 for a married couple is “high income.” If your income is that awfully high – you will lose some or even all of the FTH credit, sorry. But since you’re considered rich at that level, you should be flattered, not upset. OK, at least I tried to put a positive spin on it.
Bonus tip: if your 2008 income was too high for the credit, you will have another shot at it on your 2009 tax return.
7. Do I have to pay it back?
It depends. The FTH credit was born in 2008. If you purchased your first home between April 9th and December 31st of 2008 – your FTH credit was a loan, and you do have to pay it back over 15 years, sorry.
For houses purchased in 2009 (before December 1st though!), the FTH credit is a gift. You do not need to pay it back – as long as you stay in this home for at least 3 years. If you move out before 3 years, the gift turns into a loan, and you will need to return it. Plan to stay for a minimum of 3 years. “Stay” means actually living there, not just owning the title.
8. Is there some fine print?
I would not necessarily call it “fine” – but there sure is some small print. The law is very new, only signed in late February of 2009. Naturally, it will require much clarification. For now, the best available guidance is official instructions to form 5405.
Beyond that, my standard advice is: make friends with a good accountant who understands real estate. I know one of them.