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Extra3/21/2009 12:01 AM ET

A 'crazy complex' credit for homebuyers

The federal stimulus law has sweetened the tax credit for first-time homebuyers, making it as much as $8,000. But deciphering the changes is far from easy.

[Related content: taxes, cut taxes, tax breaks, income tax, IRS]
By The Wall Street Journal

The recently enacted economic stimulus law contains an unusually attractive new tax break for many homebuyers -- if only they can figure out how it works.

The new law sweetens a provision known as the first-time-homebuyer credit. In essence, if you meet certain qualifications, you may be eligible for a tax credit of up to $8,000. You also have a choice of claiming the credit on your federal income tax return for 2008 or 2009.

A credit is typically more valuable than a deduction because it eliminates your taxes on a dollar-for-dollar basis -- and in this case, you may get it even if you don't owe taxes.

But Congress made the homebuyer credit's fine print so devilishly tricky that many Americans are likely to have to pay an expert for help in deciphering it.

"We've had numerous calls because people are confused," says Claudia Hill, the owner of Tax Mam, a tax-services firm in Cupertino, Calif. "The problem is when things are this complicated, many people don't get the benefits that Congress intended for them."

Internal Revenue Service officials recently issued a revised form and instructions. Even so, Nancy Hays of H&R Block describes the credit as "crazy complex."Here are answers from IRS officials and tax advisers to some questions about the credit.

Date of purchase is a determining factor

Q: Who can claim the credit?

A: In general, the IRS says you may be eligible if you bought your main home, located in the U.S., after April 8, 2008, and before Dec. 1, 2009, and if you (and your spouse, if you're married) haven't owned any other main home during the three-year period ending on the date of purchase. That means you might be eligible even if you owned a home for many years before that period.

However, there are numerous other qualifications.

Q: How much is the credit?

A: That depends on when you bought the home and other factors, such as your income and the home's price.

If you bought during the 2008 period and qualify for the credit, the maximum credit is generally $7,500. But it's only half that amount if you're married and filing separately from your spouse. And even though it's called a credit, it's really an interest-free loan. You generally have to repay it over 15 years, without interest, in 15 equal installments, the IRS says. (There are several exceptions to this repayment rule. We warned you this was tricky.)

The rules are more generous if you buy a home during the 2009 period and meet all the qualifications. In that case, the maximum amount generally is $8,000, or half that amount if you're married filing separately. More important, you don't have to repay the credit at all unless that home "ceases to be your main home within the 36-month period beginning on the purchase date," the IRS says.

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Initially, there was some confusion about whether the $8,000 maximum credit would apply if someone bought a home in 2009 and chose to claim the credit on their return for 2008. It's now clear the $8,000 maximum limit does indeed apply, says Mark Luscombe, a principal tax analyst at tax research firm CCH. Naturally, though, "this doesn't help people who actually bought homes in the 2008 qualifying period and who are limited to a $7,500 credit that must be repaid," he says.

Additionally, the credit generally is limited to the amounts mentioned above -- or 10% of the home's purchase price, whichever is less. For example, if you bought a new home this year for $70,000, the maximum amount of the credit would be limited to 10% of that amount, or $7,000.

Income limits and defining a 'main' home

Q: How do the income limits work?

A: You may be eligible for the full amount of the credit if your adjusted gross income, with certain modifications, is $75,000 or less -- or $150,000 or less if married and filing jointly. However, the credit begins to be phased out if your income exceeds those amounts. You can't claim the credit at all if your income is $95,000 or more, or $170,000 or more if married and filing jointly, the IRS says.

Q: What if I built a home? How does that work?

A: You are considered having purchased it on the date of initial occupancy, the IRS says.

Continued: What if you own more than one home?

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