How the First-time Homebuyer Tax Credit Worked

Limitations of the Homebuyer Tax Credit

Everyone's always looking for the "catch" in a situation that seems too good to be true ... because so many of them are! Surprisingly, the requirements for the tax credit were fairly upfront and easy to understand, especially once the 2008 interest-free loan "credit" and all its repayment requirements was swapped for the actual credit of 2009.

Provided a person qualified as a first-time homebuyer or a long-time homeowner, there were a few basic regulations that had to be followed. Pretty much any type of principal residence could be purchased, as long as it could be affixed to land. So, single-family houses, townhomes, apartments, duplexes, mobile homes and even travel trailers (so long as they were affixed) qualified. RVs, however, were considered personal property not attached to any particular tract of land, so they were not eligible to redeem the credit. By the same token, a potential buyer who had lived in an RV was considered a first-timer, and therefore able to receive the credit if permanent home ownership became enticing.

Personal income was also a deciding factor, with the credit either lowered or eliminated altogether for buyers who made too much money. Known as the phase-out range, the income limits were [source: IRS]:

  • Nov. 6, 2009, or before: $150,000 to $170,000 for a married couple filing a joint return; for single filers, the range was $75,000 to $95,000. People with income at or below the bottom of the range could receive the full credit. If it fell within the range the credit was reduced. Above the top figure, no credit was given.
  • After Nov. 6, 2009: $225,000 to $245,000 for married couples, and $125,000 to $145,000 for singles.

A few other stipulations were in place, in addition to the income caps and principal residence rules. For example, nonresident aliens could not receive the credit, and neither could buyers purchasing a home from a close relative, like a parent, spouse, grandparent or child.

Sometimes, moves happen, whether or not we want them to. Unfortunately, these situations impacted people who'd previously enjoyed the credit. For example, if a homeowner decided to sell the home or stop using it as a principal residence less than 36 months after closing on the property, the credit had be repaid in full via the income tax return of the affected year. This applied only to the 2009 true credit [source: IRS].

However, anyone who received the 2008 interest-free loan "credit" would have to pay all remaining installments in the event of a move. On the upside, if the seller broke even or lost money on the home sale, the repayment could actually be lowered or axed completely [source: IRS].