Would-Be First Time Homebuyers Begin Running Out Of Time For $8K Income Tax Credit

The Baltimore Sun's Real Estate Wonk blogger writes:

• Determined to get the $8,000 tax credit for first-time buyers?(1) Keep in mind that the Nov. 30 deadline isn't about signing a contract -- you need to get to closing no later than that day. So says the IRS, which specifically uses the word "close."(2) This matters because you'll want to allow at least 30 days -- and probably more like 60 -- for a normal transaction to go from contract to closing. Even if there's nothing unusual about the home you're buying, you could find yourself delayed by issues relating to the loan, the appraisal, the home inspection -- you name it. That goes double if you want something more complicated, such as a foreclosure. What if you're having a home built for you? The IRS says you have to be physically occupying the place by Nov. 30. More Q&As here.

• Some real estate sites, wanting to remind you that "now is the time to buy," have countdown clocks. [...] Do you feel the pressure? Or do you have a "whatever will be will be" philosophy on the credit? (Or perhaps you're purposely waiting until the credit's gone?) The Wall Street Journal, sounding a cautionary note,(3) profiles a first-time buyer who recounts all the things he did wrong in the rush to get the $8,000. For instance, getting into a bidding war on a foreclosed home he saw only briefly, and not "taking into consideration taxes, homeowners' association fees, and the cost to fix up and maintain a distressed property."

For the story, see The clock is ticking on the $8,000 tax credit.

(1) Believe it or not, an individual need not actually be a first time homebuyer to qualify for the First Time Homebuyer Credit. Any individual who has not owned another principal residence at any time during the three years prior to the date of purchase can qualify for the credit. So, for example, if you owned a home and lost it to foreclosure, say, four years ago, and have since been either renting, shacking up with your girlfriend or boyfriend (or both) at their place, living in your mother's unheated/un-air conditioned basement, or otherwise freeloading off of somebody, you are considered to be a "first time homebuyer" for purposes of qualifying for the First Time Homebuyer Credit. Also, a taxpayer who owned a principal residence outside of the United States within the last three years is not disqualified from taking the credit for a purchase within the United States. For more infomation, See Internal Revenue Service: First-Time Homebuyer Credit Questions and Answers: Basic Information (Who is considered to be a first-time homebuyer? Would I be considered a first time homebuyer if I owned a principal residence outside of the United States within the previous three years?).

By the way, the credit is claimed on new IRS Form 5405, First-Time Homebuyer Credit, and filed with your 2009 federal income tax return. According to this form, the credit is available on the purchase of a house, houseboat, housetrailer, cooperative apartment, condominium, or other type of residence, provided you make it your main home (the one you live in most of the time).

Also, for those thinking of rushing out and buying and living in a tent, a tree house, an old dilapidated recreational vehicle or mobile home, or other form of "low cost housing" in order to "game the system" and grab the $8,000 income tax credit, the amount of the credit is limited to 10% of the home's purchase price, if the purchase price is less than $80,000. For more information, see IRS Form 5405. For those seeking to "game the system" anyway, see IRS Warns Taxpayers to Beware of First-Time Homebuyer Credit Fraud.

If two unmarried people buy a house together, IRS Notice 2009-12 provides guidance for allocating the first-time homebuyer credit between taxpayers who are not married.

(2) In cases involving certain so-called "rent-to-own" and other deferred payment situations where a seller retains legal title to the home until all payments are made, an actual "closing" may not be necessary for a would-be first-time homebuyer to qualify for the tax credit, provided that the arrangement causes a sufficient passing of the "benefits and burdens" of home ownership from the seller to the would-be buyer. The IRS addresses the passing of the "benefits and burdens" of ownership in the following Q&A (See First-Time Homebuyer Credit Questions and Answers: Basic Information):

• Q. Can a taxpayer claim the first-time homebuyer credit if the purchase is pursuant to a seller financing arrangement (for example, a contract for deed, installment land sale contract, or long-term land contract), and the seller retains legal title to secure the taxpayer's payment obligations?
  .
  A. If the taxpayer obtains the "benefits and burdens" of ownership of a residence in a seller financing arrangement, then the taxpayer can claim the credit even though the seller retains legal title. Factors that indicate that a taxpayer has the benefits and burdens of ownership include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property.

In some so-called "rent-to-own" situations in which a would-be homebuyer enters into a purchase contract with the seller that calls for an extended closing date (ie. a "slow close"), and where the homebuyer obtains immediate possession of the premises and begins making "rent" payments to the seller in the interim, he/she may be entitled to the tax credit in such a situation, provided a sufficient amount of the "benefits and burdens" of ownership (as described in the IRS Q&A, above) have passed to him/her.

(3) See The Wall Street Journal: Rookie Home Buyer Mistakes (Rushing to grab the tax credit and caught up in a bidding war over a distressed property, a first-time home buyer omits the basics).