Tax Credits for Home Buying & Remodeling

Now might be a good time to review the tax credits that are available for home purchases, move-ups, and remodeling projects. Note that a tax credit is a direct dollar-for-dollar reduction to your income tax bill, as opposed to a tax deduction, which merely reduces your taxable income.

The first-time home buyer $8,000 tax credit has been extended through April 30, 2010. (However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 still qualifies.) Keep in mind, “first-time” doesn’t really mean that you can’t have owned a house before. The IRS defines a first-time home buyer as someone who has not owned a principal residence during the 3-year period prior to the purchase. There are a few caveats on the tax credit:

It must be repaid if the home is sold or ceases to be used as the buyer’s principal residence within 3 years after purchase.

It’s limited to 10% of the home’s purchase price up to the maximum $8,000.

Applies only to homes priced at $800,000 or less. 

As of November 7, income limits have been increased. Single taxpayers with incomes up to $125,000 (previously it was $75,000) and married couples with incomes up to $225,000 (previously it was $150,000) qualify for the full tax credit.

For those who don’t qualify as “first-time” home buyers, a $6,500 credit for repeat or move-up buyers is available. You must have owned and lived in your current home for 5 consecutive years out of the last 8. All the other caveats above apply (except of course that the limit is $6,500).

For homeowners who want to remodel, the 2009 economic stimulus bill greatly upgraded the pre-existing tax credits for energy-efficient (“green“) home improvements on a principal residence, and extended them through the end of 2010. The tax credit was increased to 30% of qualifying expenses up to a maximum of $1,500. (However, the $1,500 applies to all improvements combined for the 2009-2010 period.)

Certain home improvements are considered to be so important that they are not subject to the the $1,500 limit. These include fuel cells, geothermal heat pumps, solar water heaters, solar panels, and wind energy systems. You can get a tax credit on 30% of the cost of these items, with no upper limit, for existing homes and new construction through 2016.

I’m not a tax advisor, so be sure to verify all of this before you launch into something!

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