IRS rules home buyer tax credit

Home Buyer Tax Credit: What You Need For April 30 Deadline

by Rich Vetstein on April 27, 2010

in Massachusetts Real Estate Law, Offer To Purchase, Purchase and Sale Agreements, Tax Credit

As we head to the April 30th deadline for the $8,000 Home Buyer Tax Credit, here’s a quick summary of the rules.

  • Buyers must be under contract on or before April 30, 2010, and close on or before June 30, 2010. Buyers will need to attach to their 1040 tax returns a copy of the signed purchase contract and HUD-1 Settlement Statement.
  • There’s been quite a bit of debate as to whether a signed offer to purchase or signed purchase and sale agreements is sufficient for the April 30 deadline. I’ve been erring on the side of caution by recommending getting the P&S signed by Friday, but some realtors and attorneys disagree and say that a signed offer is enough. I’d like to see some formal IRS guidance here. The IRS rules require the names of all parties on the “binding contract,” and the offer typically is addressed to “owner of record.” If Realtors are going to use the offer, ensure that all parties names are legibly shown on the offer. Bottom line: consult a tax attorney or CPA on tax credit issues, and contact us to get your purchase and sale agreement done by Friday.
  • The maximum credit amount remains at $8,000 for a first-time homebuyer –– that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.
  • The new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time home buyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
  • The new law raises the income limits for people who purchase homes after Nov. 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements

Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:

  • Dependents are not eligible to claim the credit.
  • No credit is available if the purchase price of a home is more than $800,000.
  • A purchaser must be at least 18 years of age on the date of purchase.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, is now available here. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.

Here’s an IRS produced video outlining the program.

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Do Buyers Need A Signed Offer Or Purchase And Sale Agreement For The April 30th Tax Credit Deadline?

by Rich Vetstein on April 26, 2010

in Closings, Massachusetts Real Estate Law, Offer To Purchase, Purchase and Sale Agreements, Tax Credit

As we head towards a major deadline for the popular $8,000 home buyer tax credit, we’ve been asked a number of times by real estate agents and mortgage professionals whether buyers need a signed offer to purchase or signed purchase and sale agreement by the upcoming April 30th tax credit deadline. We’re advising that buyers need a signed purchase and sale agreement by the deadline, as explained below.

In order to qualify for the $8,000 federal home buyer tax credit, the IRS states that buyers need to sign a “binding contract” for the sale by April 30, 2010.

In Massachusetts, there is a two-part system for real estate contracts. The parties first sign an Offer To Purchase, then about 2 weeks later, they sign a more comprehensive Purchase and Sale Agreement. Under the Massachusetts case of McCarthy v. Tobin, a signed standard form Greater Boston Real Estate Board Offer To Purchase may be considered a valid and binding contract even though a purchase and sale agreement must be signed at a later date. However each transaction/offer is unique and may have contingencies or future considerations which take it out of this case law rule. And remember, most of these types of cases are litigated in the courts, so it’s really fact-specific.

Under IRS rules, to claim the $8,000 credit, the buyer will have to attach to their tax return a copy of the “binding contract” showing an execution date on or before April 30, 2010. We just don’t know whether the IRS will interpret a signed Offer To Purchase as a “binding contract.” There is no question a signed Purchase and Sale Agreement is sufficient. However, there’s a risk that the IRS could reject reliance on a signed Offer to Purchase or it could delay qualification for the credit. This is a new rule so we just don’t know how the IRS will interpret it, and that raises a risk.

Accordingly, the prudent approach is to have all buyers claiming the credit sign a purchase and sale agreement by April 30th.  That is what we are advising our buyers, their Realtors and loan officers. We are also now inserting a special tax credit provision in purchase and sale agreements protecting the buyer’s eligibility for the credit.

Of course, our office is well-equipped to get a Purchase and Sale Agreement completed and signed by the Friday deadline. We’ll be working around the clock this week for our buyers and sellers! Contact us at 508-620-5352 or by email.

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