While the federal government is scrambling to provide some relief to the hundreds of thousands of besieged homeowners who are awaiting possible imminent foreclosure, it does not necessarily mean that there are no home buyers at this time.

For those who are fortunate enough to find their heads above water, the housing market is just right for the picking.

House prices have dropped by at least 20% from their 2006 peaks, with potential to go down by 10% to 15% more.

This is by no means good news for property owners, but those looking to buy their first home will not be having a hard time finding prime properties at significantly reduced prices. Plus, they have the added bonus of being able to avail of the $8,000 tax credit that the government is offering.

Read on and find out everything you need to know about the program.

What is the First-Time Home Buyer Tax Credit?

It is a refundable, dollar-for-dollar reduction of what the first time home buyer owes in taxes. It should equal 10% the price of the home up to a limit of $8,000. Unlike the original $7,500 tax credit passed in 2008 which should be repaid (sort of like an interest-free loan) at $500 per year, this one doesn’t need to be repaid.

In addition, the term “refundable” simply means that those who are qualified to claim it may do so, even if they don’t have much tax liability.

Who are qualified to avail of it?

Eligible for the tax credit are first time home buyers, who are defined to be those who have not owned a principal place of residence for the past three years prior to this purchase. Moreover, the credit is only for 2009 home buyers, specifically those who bought (or will be buying) their homes after January 1, 2009 and before December 1, 2009.

Are there any limitations to the program?

Yes, there are certain limitations to it, particularly a cap on income. The tax credit can only be availed by those who have modified adjusted gross income (MAGI as defined by the IRS) equal to $75,000 or less for single individuals, and up to $150,000 combined income for married couples. Those who earn more than these may apply for reduced credits.

An additional caveat is that the buyers have to own the newly-purchased home for at least the next three years. Otherwise, they stand to lose the privilege of the tax credit and have to return the full amount to the government.

How is the actual amount determined?

The tax credit is equal to 10% of the purchase price of the home up to a maximum of $8,000. Therefore, qualified individuals or couples who buy homes that are valued at more than $80,000 get the same $8,000 tax credit.

How can the tax credit be claimed?

For home buyers who have verified their eligibility to avail of the tax credit program (income-wise and within the “first-time home buyer” clause), claiming the credit is fairly straightforward. Home buyers should first complete the newly revised IRS Form No. 5405 titled “Firstime Home Buyer Credit”.

Once the tax credit amount is determined, the home buyer can now proceed to claim this amount in Line 69 of the 1040 Federal Income Tax Return. No pre-approval or other forms necessary.

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