First Time Homebuyer Credit
The First Time Homebuyer Credit first introduced in 2008 provided a tax credit up to $7,500 for the purchase of principal residence. In 2009, the maximum credit was increased to $8,000 for purchases before December 1, 2009. New legislation has now extended the purchase deadline to apply to contracts entered into before May 1, 2010 and closed before July 1, 2010.

Credits received before 2009 must be repaid interest free over 15 years beginning in the second tax year after the home purchase. The repayment is made through credit recapture rules which increase tax liability reported on annual tax returns. The recapture requirement was eliminated for purchases after 2008 except where the property is sold or ceases to be a personal residence within 36 months from the date of purchase.

For residences purchased after 2008 taxpayers may elect to treat the purchase as being made in the prior year. This accelerates the refundable tax credit. For example a taxpayer who purchases a home in 2009 may elect to claim the credit on their (amended) 2008 tax return and a taxpayer who purchases a home in 2010 may elect to claim the credit on their 2009 return.

Long time residents can now qualify as first-time homebuyers and receive a maximum allowable credit of $6,500. For purchases after November 6, 2009 taxpayers who maintained the same principal residence for any 5 consecutive year period during the 8 years before purchasing a new principal residence can qualify for the First Time Homeowner Credit. This can be a great opportunity for taxpayers who desire to downsize and convert their current principal residence to a rental property and buy a smaller home to live in. The new property must be used as a principal residence for the first three years after purchasing the new home and qualifying for the credit.

For residences purchased after November 6, 2009 no credit is allowed for the purchase of residences costing over $800,000. The credit is also phased out for individuals with adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 MFJ) for the year of purchase.

The First-Time Homebuyer credit Chart summarizes the rules based on the date of purchase.