Tax Credit for Move Up & Repeat Home Buyers

Here is a summary of the newly announced Tax Credit for Move Up & Repeat Home Buyers.
This is a summary only and you are advised to contact tax and legal professionals for in-depth information. This summary was provided to me by the National Association of Home Builders.
1. Who is eligible to claim the $6,500 tax credit?
Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.
2. What is the definition of a move-up or repeat home buyer?
The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a home owner who has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.
3. How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.
4. Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5. What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phaseout limits.
7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,275.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different from the rules established in early 2009?
The previous tax credits applied only to first-time home buyers and were for different amounts of money.
9. How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns).

No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.
10. What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
11. I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $6,500 home buyer tax credit. As a result, the taxpayer would receive a check for $5,500 ($6,500 minus the $1,000 owed).
12. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be after November 6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010).

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. Be sure to check with a tax advisor in cases where a HUD-1 form is not used at settlement to be sure you have sufficient documentation to attach to IRS Form 5405.
13. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program.
14. I am not a U.S. citizen. Can I claim the tax credit?
Perhaps. Anyone who is not a nonresident alien (as defined by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
15. Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.
16. Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?
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 the 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, which can be found here.
17. HUD allows “monetization” of the tax credit. What does that mean?
It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.

Under the guidelines announced by HUD, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages.

Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.

In addition, approved FHA lenders can purchase a home buyer’s anticipated tax credit to pay closing costs and downpayment costs above the 3.5 percent downpayment that is required for FHA-insured homes.

More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.
18. If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?
Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.
19. For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.

Denver named the second most popular city to live in or near

The Harris Poll just published its annual poll of the top cities in which to live or live near and Denver once again made the top 10. In fact we hold the #2 position. You can read the entire poll results at http://www.harrisinteractive.com/harris_poll/pubs/Harris_Poll_2009_10_05.pdf.

You’re Invited!

Some of you have asked me in the past month about investing in rental properties so I thought this might be of value to many of the rest of you. As you all likely know already, I get into researching the statistics and trends in the real estate market and I, like many of you, am very intrigued by what I am seeing. I also just received a copy of the housing needs assessment that was just completed for Douglas County and it is very informative. The opportunity for rental investment is looking very good long term. Among other things it states that there is an immediate need for around 1600 rental units right now in Douglas County. It also talks about the significant shortage of affordable rental housing in our area. It also has great information on demographics and vacancy rates. This is excellent information for those of you are interested in investing in rental properties. I am going to hold a forum next month to share all of this information and some ideas of types of investments to consider based on this information. You all have been very loyal to me over the years and I am committed to providing you the knowledge you need to decide if investing in real estate makes sense for you and if so how to go about it so this is only for you, my clients. I will be covering the results of this needs assessment as well as examples of types of investment that makes sense based on the current market and what is likely to happen over the next several years. I will also share with you step by step how to determine what price point of investment you should consider based on your finances and how to determine if a property will have a positive cash flow and if it makes sense to put in an offer. These formulas and processes work for all budgets so you will not have to share your personal finances in a group environment. Of course once you have this information we will get together privately should you want to look at moving forward with investing. I will ask that you RSVP so I know the quantities of handouts and also food and beverages.

Saturday July 25th 10:00 AM to Noon

 

At my office 

Prudential Preferred Real Estate

7505 Village Square Drive Suite 102

Castle Pines North, CO 80108

 

Please RSVP via email to dave@davekupernik.com or by calling me on my cell at 303-807-0808.

HB-1109 – What Doe it Mean to Me?

House Bill 1109 (HB-1109) recently was enacted to expand the protection given home owners under the Foreclosure Protection Act. The ONLY action taken in the bill is to revise the definition of a “Residence in foreclosure” to include a residence that is “occupied as the home owener’s principal place of residence and is encumbered by a residential mortgage that is at least thirty days delinquent or in default.”

The Foreclosure Protection Act was not amended in any other way and the requirements and restrictions of the Act still apply. This amendment to the Act is effective July 1, 2009. The amendment will allow a homeowner who is in default the same protection afforded to a homeowner in foreclosure. A Notice of Election and Demand (NED) must still be filed for an owner to be “in foreclosure.” Nothing in HB-1109 or the current Foreclosure Protection Act imposes an obligation on the seller to disclose that they are delinquent or in default in their mortgage. This amendment does not change the requirements or process under which REALTORS operate. If the Act applies, then an attorney should prepare the contract.

One item causing some confusion among brokers is the Commission’s decision to repeal the Contact to Buy and Sell Real Estate Foreclosure Form and the Foreclosure Property Addendum. Although the Commission repealed these forms, the Act still applies and the contract will need to comply with its provisions. Only now, attorneys will be required to complete the contracts because no form promulgated by the commission will exist.

If an “Equity Purchaser” (as defined in the Act) is purchasing a “Residence in Foreclosure,” the Equity Purchaser will need to proactively inquire whether a homeowner/seller is in default. If the seller is in default and is deemed to be a “Residence in Foreclosure” and the Equity Purchaser does no inquire, the seller would be afforded to protection of the Act and the contract will be void. Keep in mind that the Act does no apply to buyers purchasing a principal residence to live in. It was designed to protect homeowners/sellers from Equity Purchasers and foreclosure consultants.

Bill 1091: Carbon Monoxide Law

Here is a summary of Colorado’s new law that takes effect July1 2009 regarding carbon monoxide detectors. This applies to re-sale, new construction and rental properties and both multi- family and single family dwellings.

http://davekupernik.files.wordpress.com/2009/06/bill-109112.pdf

Dave Kupernik

March 2009 Article: Pardon the Personal Plug!

I have received a few calls lately, enough to make me aware that I should inform you all that I still do relocation business. Some of you met me early in my career when I worked with a different company and weren’t sure if I have retained my certification with the relocation companies. I am a Certified Relocation Specialist familiar with and certified by most relocation companies. I have a great deal of experience in dealing with both buyers relocating into the area and sellers needing their house sold as part of their relocation package. Please let me know as soon as you think you are going to relocate as I can get a head start on the process for you and make it go smoother. There is typically a lot of paperwork and I can make it go much faster with a head start. Plus I can give you information up front regarding your home’s value etc. so you have a head start when negotiating your benefits. Every relocation company allows you to choose your Real Estate Broker so all you have to do is give them my contact information and they will get me all the paperwork. I appreciate your continued business and referrals.

January 2009 Article: Interest Rates & Housing

Interest Rates

The interest rates have dropped once again to an average of about 5% and I have even seen rates in the high 4s. That can have quite an effect in two different ways. For those of us who already own a home that can mean quite a savings on a monthly basis if we refinance. For those looking to purchase it can mean your new mortgage payment will be lower than you planned or that house you want just became much more affordable. On a $250,000 mortgage a 1% drop in rate makes a difference in monthly payment of about $156 per month. If you are looking to purchase a house and wondering how much more you can afford based on the drop in rates it equates to about $26,000 in additional purchasing power without an increase in the monthly payment.

Housing affordability

Prices in general have come down. There are two basic markets; the average or sub par homes and the really nice properties. The average and sub par properties are where you can find some really amazing pricing that makes taking on any work it needs worthwhile. The majority of those homes are not special values as they are not priced properly in relation to what work is needed. But the properties that are priced really aggressively go very fast still and there are often multiple offers. So if you want a “steal” it can be had it just takes timing. I am watching the market daily to see what comes on that fits into that category and then contacting those clients who are ready to go. If you would like to be on that list let me know. I have been very successful in getting my clients in before others and preparing an offer quickly to avoid competition. These are also where the great rental opportunities exist. Remember in last month’s article I discussed how to calculate rent income to see if a property makes sense to purchase as an investment? Well when the price is lower those numbers get better and the odds of you being able to get an investment property and have it cash flow increase. Add to that the drop in rates since last month and the picture gets even brighter.

If you are looking for that “all we have to do is move in” home they are out there. They tend to be the exception so getting in them as soon as they become available is the way to go. This tough market has affected the price of these homes so you can still get a bargain but you need to be first in line so you are not competing with anyone.

December 2008 Article: Investing in Real Estate

While there is much to be said about the challenges we face in this real estate market, there is also a growing sentiment that now or in the very near future may be a great time to look at picking up investment properties. The questions that immediately come to mind for most of us are what does it take to make the math work, what type of property should I be considering, do I manage it or pay someone else and how much money does it take to get started?

Well this new section on investment properties is designed to answer some of those questions. I will run examples of local real estate that can be purchased and how the math works. If you find you have interest then give me a call or email me and we can set a time to talk more. This month I am running an example of a single family home that can be purchased in Parker. It is listed for just over $200,000 and for my example I have assumed it can be purchased for $195,000. This type of a home seems to come up maybe once a month in Parker, Highlands Ranch, and or Castle Rock. It is a single family 3 bedroom 2 bath home around 1400 square feet with an attached 2 car garage. The worksheet breaks down how the math works. This is the type of analysis you should utilize to decide if a property makes sense to purchase and what price you should pay based on what rent you can expect and what expenses you will incur. That way you can make a good decision of whether or not to even look at that property. In this example this property breaks even on a monthly basis at a purchase price of $195,000. If you could purchase it for that or less then it makes sense. If the Seller will not accept that then you can walk away knowing you should not buy that property because it does not make financial sense. This analysis also helps you know what to be watching for in terms of location, price etc. in a property. This is important because when the right property comes up you already know it makes good sense and you can act quickly and not miss the opportunity. There are also significant tax benefits to owning rental property and then there is the long term appreciation. In fact, a big part of the choice is the opportunity for resale profit down the road. All in all though it is not that complicated to figure out whether or not you should consider buying an investment property. First we determine the best approach for you; i.e. should you hire a property manager or manage it yourself, then determine how much you have to invest and from that we can calculate the price range that works and then find the property that works to make you a profit.  So the next step in your becoming a real estate investor? Call me! It is not complicated if you do it the right way and there are properties that require as little as $15,000 to get started.

April 2008 Article: A Letter from Dave

For those of you who have considered or maybe wondered about investing in rental properties I have some interesting information to share.

I have helped clients purchase a number of rental properties over the last two years and have seen them have great results. Every one has rented within the first 30 days before they have even made the first mortgage payment, with only one exception and that one rented in about 60 days. Using a formula of a 20% to 25% down payment they all cash flow. The rental market is improving as a side effect of the foreclosure rate. Douglas County in particular, is experiencing an improvement in rental and vacancy rates.

There are a lot of factors that contribute to this. We are in an area that continues to experience growth with a positive influx of jobs and people; interest rates are favorable and likely to get even more so; prices are very attractive. The particularly good news is that I am not talking about having to buy fixer uppers. There are actually properties in good to great condition available at good prices. Two of the recent purchases have actually appraised for more than the sale price. That is very unusual in this market where lenders and appraisers are quite conservative. Bottom line is this, I am a very conservative person and my advice always leans in that direction. I believe it to be a good time to purchase investment properties, if you do so utilizing a good sound plan. I don’t recommend high risk, low down payment, get rich quick programs. 20 to 25% down, a fixed rate mortgage, buying with a long term strategy is more in line with my comfort level. I believe that as the rental market continues to improve, the cash flow for rentals will be very favorable and over time the rise in rental rates will create demand as renters convert to buyers. They will decide that owning is comparable with renting and they along with other improvements in the economy will help fuel a rise in property values at which time you can liquidate your property or complete a 1031 exchange and increase your real estate holdings while taking advantage of significant tax benefits.

Give me a call and I will be glad to send you some examples of how this all works, including some information provided to me by my accountant explaining the tax advantages of owning investment properties. I am happy to schedule lunch with you, myself and my accountant so we can answer your questions directly. I look forward to helping you build your real estate portfolio. Thanks.

March 2008 Article: Special Note from Dave

Here are some issues, projects and legislation that I am tracking because they have the potential to affect us locally. Please feel free to contact me for in depth information as these are just highlights.

Legislative Issues

There are currently a couple of proposals before our State Elected Officials that are likely to affect us.

There is a proposed alteration to the real estate document fee or the addition of a transfer fee.

There is also a movement to create legislation regarding restricting the Front Range’s access to Western Slope water.

Development Projects

Work has begun on the Ridgegate Interchange on I-25 just south of Lincoln. The report I heard from CDOT is that the Ridgegate area is slated to see up to 65,000 new jobs over the next 15 to 20 years. I have a copy of the report for anyone who would like to see it. It is really interesting.

The Rueter-Hess Reservoir is moving along well. It is located a couple of miles south of the intersection of Lincoln and Chambers. It is expected to begin being filled in 2010 and slated to be about 1 and ½ times the size of Cherry Creek Reservoir.

Castle Pines North is now a city. Elections have been held for a City Council and there are many interesting changes including how the commercial areas along Castle Pines Parkway and Lagae Road are affected.