It is a Great Time to Buy Real Estate 

 

Warren Buffett penned those words back in October of last year, noting that he was buying U.S. stocks for his personal account even though he wasn't sure when the market would eventually bottom out. As it happened, it still had a ways to go: Stocks dropped another 25% after his New York Times op-ed piece appeared.

Still, the general sentiment is on the money. As appealing as it might seem to buy stocks at their absolute nadir, it's almost impossible to do so. But you're almost certainly better off buying when there's maximum pessimism in the marketplace than when everyone's feeling fat and happy.

I suspect the same is true for would-be homebuyers. The trends are certainly off-putting, with home prices down a record 3% in January and nearly 30% since their peak in mid-2006, according to the Case-Shiller 20-city home-price index. And at the risk of stating the obvious, it's also true that not everyone has the financial wherewithal to be a homebuyer, as the current economic crisis has amply illustrated.

But if you're in the market for a home and don't have one to sell, it sure seems like the stars are aligning in your favor. Prices have dropped a lot, and mortgage rates have also been scraping into record-low territory. (Bankrate.com recently showed the average 15- and 30-year rates coming in well under 5%.)

Yet another sweetener is the First-Time Homebuyer Credit, part of the economic stimulus plan passed by Congress earlier this year. Under the program, first-time homebuyers can obtain a tax credit amounting to 10% of their home's purchase price, up to a maximum of $8,000, if they purchase a home between the beginning of 2009 and Dec. 1, 2009. And unlike an earlier credit enacted for home purchases in 2008, this one doesn't have to be paid back.

In short, if would-be buyers have been putting off buying a home because they think prices could go lower, the credit may serve as an impetus to pull the trigger. Here's the skinny on how it works.

The Logistics
For most homebuyers, the credit will come into play after they've purchased a home. New homeowners claim the credit as part of their tax return after they've purchased the house, thereby reducing their tax burden. The credit reduces the amount of taxes owed, dollar for dollar, up to the 10% limit for a maximum credit of $8,000. Thus, it's more valuable than a tax deduction, which reduces the amount of income that is taxed.

For example, say you bought a home in July 2009 and claimed the credit on your return for the 2009 tax year. If your federal tax liability for 2009 was $9,000, you would owe just $1,000 in taxes ($9,000 less the $8,000 credit).

But your tax liability needn't be anywhere near $8,000 for you to be able to take full advantage of the credit. That's because it's refundable, meaning that an individual whose tax liability for 2009 was $1,500 would receive a check from the government for $6,500 ($8,000 less the $1,500 tax liability).

It's also worth noting that those who purchase homes in 2009 will be able to choose whether to file for the credit as part of their 2008 or 2009 tax returns. The key advantages of filing for the credit for the 2008 tax year is that a) you'll get your paws on the the money that much sooner and b) you'll know for sure whether your income level qualifies you for the credit. (Details on income limitations are below.) If you've already filed your taxes for 2008 but would still like to claim the credit, you'll have to file an amended 2008 return.

Down-Payment Help
The credit can also provide help if you don't have the money to pay for a home upfront. You would need to reduce your tax withholding, up to the amount of the credit, prior to making the home purchase. That would allow you to increase your take-home pay and accumulate a down payment. After buying the home, you would have to file the tax credit paperwork, but you wouldn't receive any money back because you had already taken the credit. If you reduced your withholding amount and ended up not buying a home, you'd owe the IRS the money that you should have withheld but didn't. Check with your tax advisor and/or human resources representative for guidance on how to implement this strategy.

Who's Eligible
As I noted above, you don't truly have to be a first-time homebuyer to qualify for the credit; you can also claim it if you haven't owned a primary residence in the past three years. That means those who own vacation homes or rental property--but not primary residences--are eligible. You also have to stay in the home for at least three years; otherwise, you'll have to pay back the credit.

However, you're not eligible if your spouse has owned a home within the past three years, even if you haven't owned one yourself. Also, there are income limitations for claiming the credit. Single-filer taxpayers can't claim the full credit if they earn more than $75,000; married couples can't claim a full credit if they earn more than $150,000. The amount of the credit "phases out" for single filers earning between $75,000 and $95,000 and joint filers earning between $150,000 and $170,000. (IRS form 5405 shows you how to calculate your credit if your income falls into these ranges.)