Tracy’s LA Real Estate

Making Home Affordable – Web Tools for Troubled Homeowners
It seems like every other person I meet is applying for a loan modification on their mortgage. The general feeling seems to be, “Why not? It might work.” Well, check out http://www.makinghomeaffordable.gov/pr_01192010.html. In this article, the government says there are 3-4 million homeowners who may be eligible for the Home Affordable Modification Program. That’s millions. And all of 110,000 (that’s thousands) have been approved, and of that, 66,000 have been signed. That’s for permanent modifications. They also say that 850,000 modifications in excess of $500 (that’s hundreds) has been approved. If you live in LA County and you are offered a temporary $500 modification, what will that do for you? Not a whole lot, is my guess.

Because the document submission process can be a challenge for many borrowers, the Administration has created
new resources on www.MakingHomeAffordable.gov to simplify and streamline this step.
New resources include:
• Links to all of the required documents and an income verification checklist to help borrowers request a
modification in four easy steps;
• Comprehensive information about how the trial phase works, what borrower responsibilities are to convert
to a permanent modification, and a new instructional video which provides step by step instruction for
borrowers;
• A toolkit for partner organizations to directly assist their constituents;
• New web banners and tools for outreach partners to drive more borrowers to the site and Homeowner’s
HOPETM Hotline (888-995-HOPE).
• Homeowners do not have to pay for loan modification services

If you are considering doing a short sale, where you sell your house for less than you owe on it, you pretty much have to attempt a loan modification first. You can go on the website above in the privacy of your own living room and see where it takes you. Once that’s done and you still feel a short sale is in your future, there are a number of online resources that you should read through (I can help you find them), plus you should consult your tax preparer, accountant, and attorney. After all that, call me back and we’ll talk about selling your home.

Check out this blogpost by Sean O’Toole, CEO of Foreclosure Radar.

http://www.foreclosuretruth.com/blog/sean/time-for-troop-surge-on-the-front-lines-of-the-housing-crisis/ 

If you look at his website and his past blogposts, you see a thoughtful, intelligent person who has studied and understood more of this real estate market than most. I know that I have done what he suggests, talked to people who are in trouble with their mortgages, and I’ve tried to help them find solutions. Unfortunately, if they are in real trouble with no equity, I can’t help them effectively because they have to negotiate with their lender–and that, as Sean eloquently points out, is where the trouble lies.

More thoughts on my chosen profession:

As I reflect on my year in real estate, 2009 has certainly been a challenge. But last year at this time, it was even more frightening. Would I ever sell another house? My notes from December, 2008, show that was a real concern to me. To relate back to what Sean wrote, I did feel like the best thing I could do was to be as helpful as I could. I wrote about the government programs in my blog, I took flyers around the neighborhood, I met with people to discuss their options even though they couldn’t sell. But I felt powerless in most cases to effect positive help.

In hindsight, it looks like the real estate market in our area bottomed out in the first quarter of this year, so I was truly facing a very dark time ahead. But as I looked around at other people going through that dark time, I could see that I had a huge advantage—I am my own boss and no one can lay me off but myself.

Imagine how vulnerable employees feel, not knowing if they will have a job next week. Even public employees are feeling the pinch with unpaid furlough days, frozen wages, pay cuts. It may not be easy to go out and sell another house, but at least I have that possibility in my day.

I have a full-time assistant and I have a family and a household to support. This has been both a burden and an inspiration to me through these difficult times. As my income was drastically reduced, I had to make a number of budget adjustments, but I always felt it was very important to make sure I kept my employee. Imagine how tough it is on a person who relies on an individual person for their livelihood. I have seen many Realtors decide that they can’t afford their staff anymore. Is that a really wise economy? There is the saying, “If you don’t have an assistant, you are an assistant.” If you spend your time doing administrative jobs, when are you going to go out there and do your real job, which it to make deals? The temptation is really strong to spend a lot of time on administration since it feels like work. But it’s not our work. Not if we are really doing what we need to do.

When the market is so difficult, it’s really easy to decide any effort you make is useless and you might as well not try. But with an assistant to keep busy and a family to support, I went ahead and got out there and looked for deals. The key to success is to be there the moment the decision to buy or sell real estate happens. If you are back at the office filing your paperwork, how will you be there with the buyer or seller?

What if we were out in our neighborhoods helping people get to the truth about what they really could and couldn’t do with their homes and providing them with achievable options?

South Pasadena has proven to be similar to Eagle Rock, having about doubled in value over our 9-year time span.

 

As you can see, the prices are higher in South Pasadena, but the curve has been similar to Eagle Rock.
In the last 2 years:

 

We see that prices didn’t fall quite as dramatically, but losing a quarter of a home’s value is no small number. It looks like prices have stabilized somewhat in South Pasadena, but we’re not seeing any healthy price increases at this time. Remember, in Eagle Rock we are seeing an actual trending up right now, but South Pasadena didn’t really have the big drop earlier that Eagle Rock did.

Why is that? Perhaps because South Pasadena isn’t as much of a first-time buyer market as Eagle Rock is?
Now let’s look at a zip code that is really not an entry-level marketplace, 91108, which includes San Marino:

The general trend from 2000-2006 is generally up exactly like every other zip code around here, but over the 9 years, this zip code appreciated 82%, around 20% less than South Pasadena and Eagle Rock. But now, look at the spike in the asking price versus the sold price. I guess we’re thinking we’re the Beverly Hills of the San Gabriel Valley, aren’t we? But look at the table for the average sold prices in the last 2 years here:

You can ask whatever you want for your property, but the fact is that people are going to pay what they (and the bank, if there’s a loan) think it’s worth. Look at March, 2009—one property sold! In January, only 3 sold. These are really small numbers to try to make any sense out of. This tells me that very few of these homeowners were either willing to sell in the worst part of the market, or that they absolutely had to. Voila! Upon scrutinizing the details on the March 2009 sale, I find that this was a corporate relocation sale. Most of the time, you won’t know from the public data what crisis might have forced a sale unless everything went over the edge to a short sale or a foreclosure.
Here’s the graph of the last 2 years for San Marino:

It looks like San Marino was just as hard hit by the downturn as everyone else, as far as sold prices goes. And although the asking prices are going up, the sold prices are not. How long can this go on?

 

FHA raises Buyer Requirements

This just in: according to an article on www.Inman.com , Congress  and HUD (the US Department of Housing and Urban Development) is looking at raising down payment and credit score requirements and lowering seller maximum concession limits for FHA borrowers. This won’t add anything to FHA reserves, but it will significantly limit options for first-time buyers. Check out the full story at http://www.inman.com/news/2009/12/3/fha-will-tighten-in-2010.

According to RentBits, a rental search engine for apartments and rental homes, the average rental rates for Los Angeles have seen a slight increase October over September this year. Collectively, across all bedrooms, the average rental rate has risen from $1994 in September to $2020 in October.
“As demand for rentals begins to increase, and supply remains constant, average rental rates will continue to climb.” says Dan Daugherty, CEO of rentBits. “In Los Angeles, our data shows an increase in rental rates for both Apartments and Single Family Homes.”

In most other cities across the US, rental rates for apartments are seeing a slight decrease for the year. Much of this is due to a decrease in demand. Many renters for apartments are either moving into a single-family-home rental, moving back in with family or sharing rooms with friends. This transitional period has put downward pressure on most apartment rental rates.

Do you believe this? I’m not sure, myself, but then I don’t deal with rentals very much. Check out the listings for yourself at www.RentBits.com. Other online resources for rental listings and information include www.Rent.com, www.Craigslist.com, and www.WestsideRentals.com.

One of the most difficult aspects of selling your property is figuring out where and how you are going to move next. Most people want to buy another house, but it can be a frustrating desire in so many ways, unless you have at least 20% down for the new house and can qualify for mortgages on both your new and your old house together. Sellers today don’t want to accept an offer that includes a contingency that the buyer’s house has to sell and close escrow in order to complete the purchase. The most desirable properties go in multiple offers, often to the highest all-cash offer. Certainly those prime properties don’t sell to a contingent offer. So what to do? Sell, close escrow, and rent until you can purchase a home with no such contingency. I know, no one wants to have to move twice. No one wants to sell with no idea what’s next. If you want to move to a specific neighborhood, finding the right place can be a long term proposition. In this situation, you might be renting for quite some time. But sometimes you need to sell and just rent for awhile, and it might be comforting to see that it’s quite possible.

What have you seen out there in the home rental market? Do you have any insights you’d like to share?

Some buyers have been waiting for the “shadow inventory,” the foreclosed homes the banks are reputedly holding back from the market. They hope and pray that this flood will be unleashed, prices will drop even further, and they will at last find their dream home at, say, year 2000 prices. More buyers have been actively competing in the market, but also praying for the shadow inventory floodgates to burst so they can finally get into a home. Unfortunately, they are all waiting for something that isn’t there. Well, that’s not just my opinion, folks, even the CEO of Foreclosure Radar, Sean O’Toole, believes the shadow inventory is a myth. Check out his blog, www.ForeclosureTruth.com. Here’s an excerpt:
First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices. This actually seemed like a distinct possibility a year ago when the banks were clearly holding more inventory than they were listing. But that is no longer the case. In the past year, they have resold far more than they’ve taken back, eliminating any possibility that a shadow remains.
Some observers, who earlier this year warned that this shadow inventory would deluge the market with REO listings, have now redefined shadow inventory to include properties that should be foreclosed on. They continue with misguided warnings of a deluge of REO listings any moment now.
These properties aren’t grinding through the pipeline to foreclosure and into the shadow inventory. They’re not moving at all because we as a society lack the political will to foreclose. Because the national focus is targeted on keeping homeowners in their homes, the drain is bigger than the spigot – REO properties are selling faster than distressed properties are being foreclosed on.

And that is the big issue. All properties are selling faster than people are putting them on the market , because it looks like the pendulum is swinging back towards up, so people who want or need to sell their homes are holding out for better prices. I mean, wouldn’t you if you could? Today in Eagle Rock, 90041 zip code, there are 22 listings active on the MLS. 10 are short sales, 2 are REOS, 2 have been on the market over 1 year. That leaves 8 regular sales. When you consider that good properties are selling in multiple offers of from 3 to 20 at a time, you can see that we are truly in a very hot seller’s market.

So, if you are thinking of selling your house, why shouldn’t you wait?
1. Interest rates are low now.
2. Prices are pretty good now compared to where they were earlier this year. I think we actually hit bottom the first quarter of 2009.
3. Unemployment is still high and rising.
4. Lending guidelines are unpredictable—every time banks seem to adjust to new regulatory systems, more new rules come down the pipeline. Some people who could qualify for a loan last year now can’t because of rule changes.
5. Again, the buyers are here now. Do you really want to chance waiting till next year? They could all lose their jobs and move to San Bernardino for all we know.

In other words, if you have a good reason to move now, waiting a few more months may not make you any more money. Especially if you are going into debt today to stay where you are. Any of the above items can change quickly for the worse and stymie the market once again. As Niels Bohr said, Prediction is very difficult, especially about the future.

Here we are in the ninth month of the year, 13 weeks from November 30, and buyers are realizing that they had better buy now if they want to get that $8,000 first-time-buyer credit. Remember that you have to close escrow on your home purchase by November 30 to qualify for that credit.
I’ve talked to a lot of buyers recently who have been drifting along with their Realtor of choice, often a “discount” broker who has promised to rebate them part of their commission, many other times a relative, or a friend of a friend. They’ve made a number of offers that haven’t gone anywhere. They are frustrated. They are anxious. They are ready to actually buy a house, even if it doesn’t have every single thing they want.
Unfortunately, there aren’t very many houses on the market. Today, Tuesday, September 1, 2009, there are 23 active listings on the market in the Eagle Rock 90041 zip code. That’s fewer than there were in the Spring of 2005, or in 2006, the pinnacle of the hot Seller’s market.
Prices, however, are about 20% less. Wow, Buyers, do you wonder why these sellers don’t want to go on the market right now?
I have also been talking with a number of sellers who are considering selling. I would love to put these buyers and sellers together, but there’s a problem. It seems to be about a $50,000 to $300,000 problem.
First-time buyers in my area who are pre-approved for a loan seem to be generally in the $300,000 to $600,000 price range, with most people solidly under $500,000. They are generally FHA buyers, which means they have maybe the minimum 3.5% down plus closing costs, though a few have 20 to 30% down.
Let’s look at some of the properties that have actually sold in the $300k to $500k price range in Eagle Rock:

In retrospect, I’ll bet you think some of those people got some pretty good deals compared to what is available today.
Yet, we have to be realistic about our prices. A seller who wants “x” for their house first has to have a buyer who is willing to pay that, and then they have to have a lender who is willing to lend at that price. So if you bought your house for $720,000 in 2007 and you need to sell it now, if you can get anything over $580,000 today, you are doing well. Can you do that?
Here’s one fudge factor for you: just because prices went down 20% doesn’t necessarily mean that your own particular house did. It might have, or it might not have, or it might have gone down more. We are looking at an average of prices and general trends. There are always exceptions. Did you do a bunch of work to it? Is it in the very best location in your zip code? Every case is individual, especially in such a diverse area as northeast Los Angeles, Glendale, Pasadena, Altadena, South Pasadena, where we don’t have a lot of tract homes, where most are custom-built. But you, the homeowner, are not always the best judge of how unique and valuable your house is. I could show you another list of all the homes that did not sell this year, even though they tried. Or the ones that were on the market on and off at ever lower prices until they sold. That is why you work with a professional Realtor who is experienced in this market and whom you can trust to give you an honest objective view of where your individual home fits in this confusing grid of trends and averages.

A boon for new homebuyers, scheduled to last through next March, will be out of money long before that.
By Les Christie, CNNMoney.com staff writer
Last Updated: June 12, 2009: 3:14 PM ET
NEW YORK (CNNMoney.com) — Time is running out for California residents wanting to take advantage of a $10,000 tax credit. The state set aside $100 million to help home buyers purchasing newly built homes, hoping to jump start the moribund residential-construction market. But only about 20% of the pot is left.
“We’re less than four months into it, and all the tax credits authorized are gone, or practically gone,” said Tim Coyle, a senior VP with the California Building Industry Association (CBIA).
The program launched in March and by June 3 nearly $24 million in tax credit certificates had already been issued, according to the state’s Franchise Tax Board.
That leaves nearly $76 million in credit available – but there are already numerous claims on that money. In fact, if all the submitted applications are approved, only $17.5 million will be left in the fund. And it has a run rate of about $10 million per week.
“The program is working better than intended,” said Coyle. “It’s really pushing people off the fence.”
How it works
The credit is available on a first-come first-served basis and was supposed to last through March 2010. Almost any newly built home qualifies, as long as it’s an owner-occupied, principal residence on which property tax is paid. It could be a single-family home, a condo, a coop, a manufactured home or mobile home — even a houseboat. Only owner-built housing does not qualify. There is no cap on the home price or buyer’s income.
The credit reduces taxes dollar-for-dollar up to $3,333 a year for three years, or 5% of the purchase price of a home, whatever is less. Unlike the federal first-time homebuyers tax credit, which is $8,000 or 10% of the home price, whichever is less, the California credit is not refundable. That means the credit will only wipe out taxes up to the full amount paid or owed but no more.
For example, if the buyer’s tax bill came to $2,000 for the year, a buyer claiming the full $3,333 would owe nothing but couldn’t claim the extra $1,333 back from the state.
First-time, new-home buyers in California can claim both the federal credit and the state if they qualify. That could reduce taxes by $11,333 for the first year of ownership.
More money coming?
Because the money has gone so quickly, the state legislature is considering adding another $200 million to the program. That may be difficult to accomplish right now, however: The state is worse than flat-broke; it’s running a $24 billion budget deficit and has the lowest bond rating of any state.
But Coyle argues that the credit is a net win for state coffers and it puts people to work. “Every time you build a home in California, you’re generating $16,000 in taxes,” he said.
During the boom years, developers were building about 200,000 housing units annually and supported about a half million jobs. Now, only about 50,000 new homes will go up this year and industry employment has shrunk to a fraction of its peak. From 2006 to 2007 alone, industry employment dropped by about 220,000 jobs, according to the CBIA.
Passage of an extension of the program has a good chance, according to Assemblywoman Anna Caballero (D-Salinas), who supports a new bill that already won Assembly approval and has gone to the state Senate.
There has been little opposition, she said, but the program has to be “revenue neutral,” which could limit how much is made available as funds would have to be cut from other areas to pay for it.
There is also one big change from the original offering: People buying homes under construction – not just those already finished – will qualify, which should help put projects back on track.
“It creates a reservation system that was absent in the first bill,” said Caballero. “Buyers only received a credit when they closed escrow. Now, they would get it with a signed contract.”
“Contractors in Southern California were reporting no housing starts last January,” she added. “Now, they have new crews out on the job. That’s significant for California.”

For those of you who want a better understanding of how we got into this global economic mess, National Public Radio has several programs that have podcasts you can read, watch, or listen to that summarize and define a lot of the terms we see tossed around in the news today. They posit some non-accusatory and intelligent explanations both of how financial systems work and where things went wrong. I’m not saying I agree with every word, but I think it’s well-balanced and worth absorbing. Knowledge is power. Check it out at:

This American Life

How Stuff Works:

Planet Money:

Are You Ready for a Good Deal?

 

What constitutes a good deal to you?

“I’ll know it when I see it,” you say. Well, maybe you think you are in the market for a good deal, but you just told me that you are not. What?! Well, do you have a list of what fits in your criteria for a good deal? Do you know what your numbers are for purchasing, monthly expenses, possible repairs? Do you have your financing lined up and your investment money ready? Whether you plan to buy your primary residence or an investment property, you need to have worked out a number of issues before you’re ready to look for a good deal.

Right now, we are in the best market for finding a deal that we have experienced in probably 12 years. This doesn’t mean that prices are at 1997 levels, but that there are affordable properties available to buy that can make real financial sense in terms of potential for equity building as well as immediate neutral to positive cash flow on your investment.

For example: A property with two 2-bedroom, 1-bath houses on a street-to-street lot in a decent neighborhood of Eagle Rock listed for $269,900. If you put 25% down, even at under-market rents of $800 each, you could have immediate positive cash flow plus real potential for appreciation over time. If you want to live on the property as your primary residence, you can use FHA financing and purchase with as little as 3.5% down! I don’t know if you’ve been able to buy a deal like this since they changed the tax law in 1987! And this property was a good owner-occupied candidate with privacy for both units—it even had separate yards. Wow, does that sound like a deal? Sign me up, let me go talk to my lender.

Nope. Too late. That place had 6 offers within 4 days and is in escrow. And it took that long only because the tenant was uncooperative about showing any other day than Saturday.

If you are looking for a good deal, you must be ready to jump on it right away with no hesitation. Here is your list of what it takes to be ready:

1. Financing:  You must be prepared with a pre-approval letter, documentation of your down payment,  liquid funds available for a deposit, and very likely with a copy of your credit score. Pushy, huh? Invasive, eh? Well, that is what these foreclosing bank sellers of great deals want to see from you, because they know how they got into this mess.
2. You must be open to doing whatever you need to do to get your offer accepted.

A.      That might mean you make an offer without seeing all of the property. With tenant-occupied properties, you often can’t see inside them unless you have an accepted offer. Think about it, the tenant has no incentive to cooperate with people coming through their home. All they see is a good chance they’ll have to move or at least to have their rent raised. Why should they make it easy for you? The odds are good you won’t buy the property and they will have been inconvenienced for nothing. You will see the entire property when you do inspections, so don’t stress out about it. This tenant-showing subject deserves an article of its own, so look for that soon.

B.      You might need to reduce or remove all your contingency periods up front. A harrowing idea, but some lenders are beginning to require this because they are overwhelmed with offers. How can you make this work for you? You might need to go so far as to do an inspection before you know that you have the deal. Is it worth $500 or $600 to make sure that your sewer line isn’t crumbled and rusted away under that driveway, or that the systems are safe enough to make the house habitable?

C.      Most important, you must be able to act instantly. If there are two or more partners going into this deal, the ideal plan is to assign one person to be the ultimate decision maker, even to the point of giving them a real estate power of attorney to sign for all the parties. Don’t you trust that person? Then why are you thinking you’re going to invest with them? If you want to have Mom and Dad approve your purchase, you should have them come with you to look at the property first. There is no time to line up a viewing next weekend for them. If it’s a good deal, it may well be gone. That’s part of it being a good deal!

 

There is a series of excellent books you should read about real estate, written with Gary Keller, one of the creators of Keller Williams Realty. I’m not interested in their real estate brokerage model, but this guy has co-written some really excellent, knowledgeable books for Realtors, investors, and even one for first time buyers. Shift just came out this year and is right on for understanding and profiting from the current market. Your First Home is for—you guessed it—first  time buyers. The Millionaire Real Estate Investor was published in 2005, so don’t take the easy financing ideas seriously, most of them are history. But the fundamentals of investing are quite good. I do have some thoughts on some of the concepts, such as always buying 10-20% below the current market. In Los Angeles, some of these rules just don’t apply, but the eventual increase in equity will more than counterbalance that. Yes, even with the economy crashing down around us, I believe that.

You can go to the website, www.millionairesystems.com, click on the Free Downloads, and access worksheets that will help you organize yourself and help you plan how to accomplish your goals. Give them a try and then maybe you really are ready to find a good deal.

FIRST-TIME HOMEBUYER TAX CREDIT

 

This was sent to us by the president of our region of Coldwell Banker, Betty Graham: 

 

Frequently Asked Questions

 

In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first-time homebuyers to purchase a home. The credit was designed as a mechanism to decrease the over-supply of homes for sale.

 

For 2009, Congress has increased the credit to $8000 and made several additional improvements. This revised $8000 tax credit applies to purchases on or after January 1, 2009 and before December 1, 2009.

 

Tax Credits — The Basics

 

1.   What’s this new homebuyer tax incentive for 2009?

 

The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.

 

2.   Who is eligible?

 

Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

 

3.   How does a tax credit work?

 

Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 – $8000 = $1500)

 

4.   So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?

 

This tax credit is what’s called “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference between $8000 credit amount and the amount of tax liability. ($8000 – $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

 

5.   How does withholding affect my tax credit and my refund?

 

A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.

 

 

 

6.   Is there an income restriction?

 

Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

 

7.   How is my “income” determined?

 

For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

 

8.   What if I worked abroad for part of the year?

 

Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

 

9.   Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?

 

Not always. The credit phases-out between $75,000 – $95,000 for singles and $150,000 – $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return).

 

For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

 

Couple’s income $165,000

Income limit 150,000

Excess income $15,000

 

The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).

 

In this example, the disallowed portion of the credit is 75% of $8000, or $6000

($15,000/$20,000 = 75% x $8000 = $6000)

 

Stated another way, only 25% of the credit amount would be allowed.

In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

 

 

10.  What’s the definition of “principal residence?”

Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.

 

11.  Are there restrictions on the location of the property?

 

Yes. The home must be located in the United States. Property located outside the US is not eligible for the credit.

 

12.  Are there restrictions related to the financing for the mortgage on the property?

 

In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

13.  Do I have to repay the 2009 tax credit?

 

NO. There is no repayment for 2009 tax credits.

 

14.  Do 2008 purchasers still have to repay their tax credit?

 

YES. The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

 

Some Practical Questions

 

15.  How do I apply for the credit?

 

There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

16.  So I can’t use the credit amount as part of my downpayment?

 

No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

 

17.  So there’s no way to get any cash flow benefits before I file my tax return?

 

Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

 

Some “Real World” Examples

 

18.  What if I purchase later this year but can’t get to settlement before December 1?

 

The credit is available for purchases before December 1, 2009. A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.

 

19.  I haven’t even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?

 

You’ll have a helpful choice that might speed up the process. Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options.

 

·      If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15.

·      They can extend their 2008 income-tax filing until as late as October 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.)

·      If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)

 

Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.

 

20.  I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7500 credit?

 

No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.

 

21.  If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?

 

No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.

 

22.  I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8000 credit, as well?

 

No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time homebuyer.

 

23.  I live in the District of Columbia. If I qualify as a first-time homebuyer, can I use both the $5000 DC credit and the $8000 credit?

 

No; double dipping is not allowed. You would be eligible for only the $8000 credit. This will be an advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.

 

24.  I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?

 

One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions apply. (See below, #24). Note that this same 3-year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.

 

25.  What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?

 

The repayment rules are eased for many circumstances. If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.

26.  I have a home under construction. Am I eligible for the credit?

 

Yes, so long as you actually occupy the home before December 1, 2009.

 

 

WITHHOLDING EXAMPLES:

Note: The impact of estimated tax payments would be the same.

 

Situation 1: Sally plans her withholding so that her withholding is as close as possible to what she anticipates as her income tax liability for the year. When she fills out her 1040, her liability is $6000. She has had $6000 withheld from her paycheck. She also qualifies for the $8000 homebuyer credit.

 

Result: Sally’s withholding satisfies her tax liability and reduces it to zero. She will receive a refund of the full $8000.

 

Situation 2: Nick and Nora file a joint return. Nick is self-employed and makes estimated payments; Nora has taxes withheld from her salary. When they compute their taxes, their combined withholding and estimated tax payments are $11,000. Their income tax liability is $9800. They also qualified as first-time homebuyers and are eligible for the $8000 refundable tax credit.

 

Result: Ordinarily, their combined estimated tax payments and withholding would make them eligible for a refund of $1200 ($11,000 – $9800 = $1200). Because they are eligible for the refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund + $8000 refundable tax credit = $9200)

 

Situation 3: Cesar and LuzMaria both have income taxes withheld from their salaries and file a joint return. When they file their income tax return, their combined withholding is $5000. However, their total tax liability is $7200, generating an additional income tax liability of $2200 ($7200 – $5000). They also qualify for the $8000 first-time homebuyer tax credit.

 

Result: Cesar and LuzMaria have been under-withheld by $2200. Ordinarily, they would be required to pay the additional $2200 they owe (plus any applicable interest and penalties). Because they are eligible for the refundable homebuyer tax credit, the credit will cover the $2200 additional liability. In addition, they will receive an income tax refund of $5800 ($8000 – $2200 = $5800). If they owed penalties and/or interest, that amount would reduce the refund.