You May Qualify for First-Time Home Buyer Tax Benefits
Special provisions exist for first-time buyers
If you are defined as a "first-time home buyer" you may qualify for penalty-free IRA distributions, 401(k) hardship withdrawals, and/or special mortgage programs. This can be great for someone who may be starting over later in life.
Strangely, first-time home buyer doesn't mean what you may think. You can fall under this definition even if this home purchase is not your first. This is great as many people who are 50+ have already owned a home at least once in their life.
And the definition can vary depending on what program it applies to.
Who Really Qualifies as a "First-Time" Home Buyer?
For purposes of a penalty-free IRA withdrawal, here's how the IRS defines a first-time home buyer (in IRS publication 590):
"If you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."
In simple language, you can't have owned a home for two years prior to the home you are now purchasing.
If you meet this definition, then for funds that will be used to purchase a home you can withdraw up to $10,000 from your IRA even if you are not yet age 59 1/2—and you will not have to pay the early IRA withdrawal penalty tax. You will still, however, pay income taxes on the withdrawal.
Mortgage Programs for 'First-Time' Home Owners
For mortgage programs, the definition of a first-time home buyer is usually altered to mean someone who has not owned a home in the past three years.
Special first-time buyer mortgage programs offer preferred terms to such buyers.
Using these preferred-term loans you can buy a home with as little as 3 percent down. This can be great for some, but such specialized first-time buyer loans may come with restrictions, so work with a mortgage broker to explore all your financing options.
If you have good credit, a conventional mortgage instead of a first-time buyer program may make more sense.
Tax Credits for First-Time Buyers
During the Great Recession, the government wanted to spur home buying activity, so Congress approved a special tax credit: the first-time homebuyer credit (FTHBC). This tax credit is no longer available, and some people who used it may be required to repay it. A brief overview of the first-time buyer credit rules is below.
First-time buyer credit for homes purchased in 2008. The people who received the FTHBC credit in 2008 are required to participate in the "recapture period" by repaying the credit over 15 years at 6 2/3% per year. So, if the maximum credit of $7,500 was taken, then $500 would be due each year for 15 years. If you sell the home, then all of the remaining credit amount would be due on that tax year's report.
Your home stops being your main home in the following circumstances:
- You sell the home.
- You transfer the home to a spouse or former spouse in a divorce settlement.
- The home is converted to a rental or business property, or vacation or second home.
- You no longer live in the home for a greater number of nights in a year.
- The home is destroyed or condemned.
- The home is lost in foreclosure.
- You die.
Credit for homes purchased in 2009 or 2010. For home buyers who took the credit in 2009 or 2010, the rules changed considerably. Basically, the IRS did not intend for people to flip the homes and keep the credit. The maximum credit amount increased to $8,000 for first-time buyers, and the repayment clause was eliminated based on certain requirements. Because more than 36 months have passed since the issuance of this credit, the requirements for repayment are not relevant at this time if the home was and still is your primary residence. If you turn the property into a rental property or business, however, the IRS dictates that you must repay the full amount and complete Form 5405 as an attachment to your federal tax return for the year it was converted.