This was sent to me by mortgage broker Jamie Brown with Golfside Lending, 800 Belcher Rd. N, Clearwater, FL 33765. Jamie can be reached on (727) 447-5140.
First-time Home Buyer Tax Credit Enacted
as Part of Housing Stimulus Package
NAHB has Resources to Help You Promote it to Consumers & Members
I am absolutely thrilled to announce that, after months of intensive lobbying by the entire NAHB federation and the tireless dedication of our staff in Washington, the President signed the housing stimulus package into law.
This milestone legislation will help provide an enormous boost to the housing industry in the form of a tax credit for first-time home buyers, as well as much-needed measure that will improve mortgage liquidity, foster refinancing of troubled loans and expand the supply of affordable rental housing.
The temporary first-time home buyer tax credit will help stimulate home buying, reduce excess supply in housing markets and shore up home prices, so it is critical to get the word out to consumers right away.
NAHB is immediately launching resources to help you understand the credit and promote it ro consumers, including:
To learn more abojut how the legislation will help the home building industry through FHA modernization, GSE reform, and expansion of the mortgage revenue bond and Low Income Housing Tax Credit programs, read the special edition of Nation's Building News (NBN) here.
NAHB staff is ready to help you get the maximum impact from these resources. If you have any questions, contact NAHB Public Affairs by email or telephone at ext. 8061.
Frequently Asked Questions About the
First-Time Home Buyer Tax Credit
1. Who is elibilbe to clain the $7,500 tax credit?
First time home buyers purchasing any kind of home - new or resale - are eligible for the tax credit.
2. What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owne a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer credit.
3. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credithy, provided that the home will be used as a principal residnece and the buyer has not owned a home in the privious 3 years. This includes singel-family detached homes, attached homes like townshouses, and condominiums.
4. Are there income limits to determine who is eligible to take the tax credit?
Yes. Home buyers who file their taxes as single or head-of-household taxpayers can clain the credit if their modified adjusted gross income (MAGI) is less than $75,000. For married taxpayers filing a joint tax return, the MAGI limit is $150,000. the limit is based on the buyer's modified adjusted gross income for the year that the house is purchased, except for certain purchases in 2009.
5. What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year munus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjustd gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deduction, IRA-contribution deductions and deductions for higher education costs.
If you've heard the term "Short Sale" regarding Real Estate lately...it sounds to me like "Mark to Market" is what we're basically doing...Selling property for "what they're worth TODAY", regardless of how much debt that property is now carrying.
If you have ANY questions on BUYING or SELLING in this wacky Real Estate market that we're in...please CALL DON TAYLOR, TODAY!! 727-458-7828
In accounting and finance, mark to market is the act of assigning a value to a position held in a financial instrument based on the current market price for that instrument or similar instruments. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is marked to market, for accounting purposes it is assigned the value that it would fetch in the open market currently.
According to Stan Ross, CPA, the practice of mark to market as an accounting device first developed among traders on futures exchanges in the 19th century. It was not until the 1980s that the practice spread to big banks and corporations far from the traditional exchange trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals.
To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will remove the appropriate amount from his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. As an example, the Chicago Mercantile Exchange, taking the process one step further, marks positions to market twice a day, at 10:00 am and 2:00 pm.[1]
Over-the-counter (OTC) derivatives on the other hand are not traded on exchanges, so their market prices are not as readily available. During their early development, OTC derivatives such as interest rate swaps were not marked to market frequently. Deals were monitored on a quarterly or annual basis, when gains or losses would be acknowledged or payments exchanged.
As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined (because there was no real day-to-day market available), so assets were being 'marked to model' using estimated valuations derived from financial modeling, and sometimes marked to fantasies. See Enron and the Enron scandal.
Internal Revenue Code Section 475 contains the mark to market accounting method rule. Section 475 provides that dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also provides that dealers in commodities can elect mark to market treatment for any commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions).
Related to the entire discussion is the effect of the issuance of Financial Accounting Standards Board Statement No. 157 “Fair Value Measurements”,[2] which became effective after November 15, 2007.[3]
FAS Statement 157 includes the following:
FAS 157 defines "fair value" as: “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
While FAS 157 does not introduce any new requirements mandating the use of fair value, the definition as outlined does introduce key differences.
First, it is based on exit price (for an asset, the price at which it would be sold) rather than an entry price (for an asset, the price at which it would be bought), regardless of whether the entity plans to hold or sell the asset.
Second, FAS 157 emphasizes that fair value is market based rather than entity specific. Thus, the optimism that often characterizes an asset owner must be replaced with the skepticism that typically characterizes a risk-averse buyer.
FAS 157’s fair value hierarchy underpins the standard. The hierarchy ranks the quality and reliability of information used to determine fair values – quoted prices are the most reliable valuation inputs, whereas model values that include inputs based on unobservable data are the least reliable. A typical example of the latter is shares of a privately held company whose value is based on projected cash flows.
FAS 157 represents the so-called fair value rule put into effect by the FASB, the accounting rule makers. It requires that certain assets held by financial companies, including sensitive investments linked to mortgages and other kinds of debt, be marked to market. In other words, you have to value the assets at the price you could get for them if you sold them right now on the open market.
The rule forces banks to mark to market, rather to some theoretical price calculated by a computer — a system often criticized as “mark to make-believe.” (Occasionally, for certain types of assets, the rule allows for using a model)
Sometimes, there is no market—not for toxic investments like collateralized debt obligations, or CDOs, filled with subprime mortgages. There are few, if any, buyers for such products. And if there is no market, FAS 157 says, a bank must mark the investment’s value down, possibly all the way to zero.
As a result, several big banks have had to write down billions of USD in CDO were required to bring down their leverage levels.
FAS 157 makes no distinction between non cash-generating assets, i.e., broken equipment, which can theoretically have zero value if nobody will buy them in the market – and cash-generating assets, like securities, which are still worth something for as long as they earn some income from their underlying assets. The latter cannot be marked down indefinitely, or at some point, can create incentives for company insiders to buy them out from the company at the under-valued prices. Insiders are in the best position to determine the creditworthiness of such securities going forward.
Example: If an investor owns 100 shares of a stock purchased for $40 per share, and that stock now trades at $60, the "mark-to-market" value of the shares is equal to (100 shares × $60), or $6,000, whereas the book value might (depending on the accounting principles used) only equal $4,000.
Similarly, if the stock falls to $30, the mark-to-market value is $3,000 and the investor has lost $1,000 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.
In marking-to-market a derivatives position, at the end of each trading day, each counterparty exchanges the change in the market value of their position in cash. If one of the counterparties defaults in this daily exchange, that counterparty's position is immediately closed by the exchange and the clearing house is substituted for the counterparty's position. Marking-to-market virtually eliminates credit risk, but it requires monitoring systems that usually only large institutions can afford.
See Risk Management by Crouhy, Galai, & Mark, 2001, page 445
Stock brokers allow their clients to access credit via margin accounts. These accounts allow clients to borrow funds to buy securities. Therefore, the amount of funds available is more than the value of cash (or equivalents). The credit is provided by charging a rate of interest, in a similar way as banks provides loans. Even though the value of securities (stocks or other financial instruments such as options) fluctuates in the market, the value of accounts is not calculated in real time. Marking-to-market is performed typically at the end of the trading day, and if the account value falls below a given threshold, (typically a predefined ratio by the broker), the broker issues a margin call that requires the client to deposit more funds or liquidate his account.
Section 132 of the Emergency Economic Stabilization Act of 2008, titled "Authority to Suspend Mark-to-Market Accounting" restates the Securities and Exchange Commission’s authority to suspend the application of FAS 157 if the SEC determines that it is in the public interest and protects investors.
Section 133 of the Act, titled "Study on Mark-to-Market Accounting," requires the SEC, in consultation with the Federal Reserve Board and the Department of the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.[4]
First-Time Homebuyer Tax Credit
Part II
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.
Here's another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer's income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
8. Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
9. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
10. I heard that the tax credit is refundable. What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the goverment sending the taxpayer a check for a portion or even all of the amout of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
11. What is the difference between a tax credit and a tax deduction?
A tax credit is a dollar-to-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer's tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375.
12. Can I claim the tax credity if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
No. The tax credit cannot be combined with the MRB home buyer program.
13. I live in the District of Columbia. Can I claim both the DC first-time home buyer credit and this new credit?
No. You can claim only one.
14. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous 3 years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
15. Does the credit have to be paid back to the government? If so, what are the payback provisions?
Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until 2 years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
16. Why must the money be repaid?
Congress's intent was to provide as large a financial resource as possible for the home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.
17. Because the money must be repaid, isn't the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.
18. If I'm qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
19. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
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