Harvey Realty, Inc.

Q 21.  What are the loan limits under the Recovery Act?

A  The Recovery Act has increased the maximum conforming loan limit from $625,500 to $729,750 for FHA, Fannie Mae and Freddie Mac loans.  These higher loan limits are intended to ease the mortgage crisis of the late 2000s by helping homeowners and homebuyers get more affordable mortgage loans.

As background, the $729,750 loan limit was originally established in 2008, but dropped down to $625,500 on January 1, 2009.  The new law reinstates the conforming loan limit to 125% of the 2008 local area median home price, not to exceed $729,750.

Q 22.  What are the FHA loan limits in California?

A  The new FHA loan limit is 125% of the 2008 local area median home price or $271,050, whichever is greater, but not to exceed $729,750 for one-unit properties.  The higher FHA loan limit will assist REALTORS® and their clients to obtain safe mortgage loans with fixed interest rates, low down payment requirements, and other affordable terms.

Counties in California at the maximum FHA loan limit of $729,750 are Alameda, Contra Costa, Los Angeles, Marin, Monterey, Napa, Orange, San Benito, San Francisco, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, and Ventura.  The FHA loan limits for the other counties in California range from $271,050 to $679,500.  For FHA’s Mortgage Limits List, go to https://entp.hud.gov/idapp/html/hicost1.cfm.

The Secretary of the Department of Housing and Urban Development (HUD) has the discretionary authority to increase the FHA loan limit for any sub-area smaller than a county if the median home price in that sub-area warrants a higher loan limit.

Q 23.  Which loans qualify for the new FHA loan limits?

A  The new FHA loan limits apply to loans for which credit is approved for the borrower in the calendar year 2009 (until December 31, 2009).

Q 24.  Where can I obtain more information about FHA loans?

A  For more information about FHA loans, go to HUD’s website at http://www.hud.gov/fha/choosefha.cfm or the FHA’s website at http://portal.hud.gov/portal/page?_pageid=73,1&_dad=portal&_schema=PORTAL.
 
Q 25.  What are the Fannie Mae and Freddie Mac loan limits in California?

A  The new Fannie Mae and Freddie Mac conforming loan limit is 125% of the median home price or $417,000, whichever is greater, but not to exceed $729,750.  Counties in California that are at the maximum loan limit of $729,750 are Alameda, Contra Costa, Los Angeles, Marin, Monterey, Napa, Orange, San Benito, San Francisco, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, and Ventura.  The loan limits for the other counties in California range from $417,000 to $679,500.

For more information about Fannie Mae and Freddie Mac, including lookup tables for the loan limits for specific counties and high-cost areas in California, go to the website of the Office of Federal Housing Enterprise Oversight at http://www.ofheo.gov/regulations.aspx?nav=128.

Q 1.  What, in a nutshell, is the $8,000 tax credit for first-time homebuyers under the new law?

A  A first-time homebuyer as defined may receive a refundable tax credit up to $8,000 for purchasing a principal residence in the U.S. from January 1, 2000 to November 30, 2009, inclusive (see Questions 5 to 16).  No repayment is required if the buyer owns and occupies the property for 36 months (see Question 17).  This new law enhances the preexisting $7,500 tax credit enacted in 2008 which still applies for purchases from April 9, 2008 to December 31, 2008 (see Questions 18 and 19).

According to the U.S. Department of the Treasury, nearly half of the homebuyers in 2008 were first-time homebuyers.  Hence, the new tax credit for first-time homebuyers, along with affordable home prices and historically low mortgage rates, should help spur the housing market.
 
Q 3.  What is a tax credit?

A  A tax credit is a dollar-for-dollar reduction of tax owed.  In contrast to a tax credit, a tax deduction is merely a reduction of taxable income.  Hence, a tax credit is generally more valuable to the taxpayer than a tax deduction.  To illustrate, an $8,000 tax deduction for a taxpayer in a 25% tax bracket would only save the taxpayer $2,000 in taxes, whereas an $8,000 tax credit would save the taxpayer $8,000 in taxes.

Q 4.  What is the significance of a “refundable” tax credit?

A  That a tax credit is “refundable” means that any credit amount not used to reduce the tax owed may be added to the taxpayer’s tax refund check.  In other words, a taxpayer may receive a tax credit even if he or she has no tax liability to offset that credit.

As an example, let’s say a taxpayer filing his tax returns on April 15 would have owed $2,000 to the IRS.  If the taxpayer can now claim an $8,000 refundable tax credit, he can expect to receive a refund check from the IRS for $6,000.

Q 5.  Who is eligible as a “first-time homebuyer” for the $8,000 tax credit?

A  For purposes of the $8,000 tax credit, a “first-time homebuyer” is defined as any individual (or spouse) with no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which the tax credit applies (26 U.S.C. § 36(c)(1)).  For income restrictions, see Question 9.

As an example, an unmarried buyer who closes escrow on a purchase on June 30, 2009, would qualify as a “first-time homebuyer” as long as the buyer did not own a principal residence during the period from July 1, 2006 to June 30, 2009.  Even if the taxpayer owned another principal residence in the past, he or she can still qualify as a “first-time homebuyer” as long as the taxpayer transferred off title to that other home over three years ago.

Q 6.  What constitutes a “principal residence” under the $8,000 tax credit?

A  A “principal residence” is generally the home the taxpayer lives in most of the time (26 U.S.C. § 121).  It can be a house, condominium, townhome, manufactured home, or similar type of property located in the U.S.  To qualify for the federal $8,000 tax credit, the property can be new construction or a resale.  It cannot, however, be a vacation home or rental property.

Q 7.  What constitutes a “purchase” to be eligible for the $8,000 tax credit?

A  A “purchase” for purposes of this tax credit is defined as any acquisition, except as set forth in Question 15 (26 U.S.C. § 36(c)(3)).  For a home that the taxpayer constructs, the purchase date is the date the taxpayer first occupies the home (26 U.S.C. § 36(c)(3)(B)).

Because a purchase is defined as an acquisition, it generally occurs when escrow closes and title to the property transfers to the buyer, and not when the underlying purchase contract is signed.  To illustrate, a buyer who enters into a contract to purchase a property on November 13, 2009, but closes escrow on December 23, 2009, would not qualify for the $8,000 tax credit because, based on the law as it is currently written, acquisition does not occur before the law expires on November 30, 2009.

Q 8.  How is the amount of the tax credit calculated?

A  The maximum tax credit for an individual first-time homebuyer is 10 percent of the purchase price, not to exceed $8,000 (26 U.S.C. § 36(b)(1)(A)).  For married individuals filing separate tax returns, the tax credit is capped at $4,000 (26 U.S.C. § 36(b)(1)(B)).

For a purchase price over $80,000, as is often the case in California, the first-time homebuyer tax credit will be capped off at $8,000.  “Purchase price” under this law is defined as the adjusted basis of the principal residence on the date such residence is purchased (26 U.S.C. § 36(c)(4)).

Q 9. Is there an income restriction to be eligible for the $8,000 tax credit?

A  Yes.  The first-time homebuyer tax credit may be restricted by the taxpayer’s income.  The tax credit starts to phase out for an individual taxpayer with a modified adjusted gross income from $75,001 to $95,000 (or $150,001 to $170,000 for joint filers).  The tax credit is eliminated entirely if an individual’s modified adjusted gross income is over $95,000 (or $170,000 for joint filers).  (26 U.S.C. § 36(b)(2).)

Q 10.  What is a modified adjusted gross income?

A  First, a modified adjusted gross income or MAGI is a taxpayer’s adjusted gross income (AGI) plus certain items, such as IRA deductions, student loan deductions, higher education costs, foreign income, and foreign housing deductions, among other things.  Second, an adjusted gross income (AGI) is a taxpayer’s gross income minus certain deductions, which are often called “above the line” deductions.  Most tax deductions are “above the line” deductions, except itemized deductions from Schedule A and personal exemptions.
 
Q 11.  When must a first-time homebuyer purchase a property to qualify for the $8,000 tax credit?

A  To be eligible for the $8,000 tax credit, a first-time homebuyer must purchase a principal residence from January 1, 2009 to November 30, 2009, inclusive (26 U.S.C. § 36(f) and (h)).  The deadline is November 30, 2009, and not December 31, 2009.  That the deadline is not at the end of the year may work as a trap for unwary buyers.

For the first-time homebuyer tax credit for acquisitions from April 9, 2008 to December 31, 2008, see Question 18.

Q 12.  When can a taxpayer claim the $8,000 tax credit?

A  According to an IRS announcement on February 25, 2009, first-time homebuyers who qualify for the $8,000 tax credit by purchasing a home before December 1, 2009 have a special option of claiming the tax credit on either their 2008 or 2009 tax returns (IR 2009 14).

Q 13.  Does a married person qualify for the $8,000 tax credit if his or her spouse has owned a principal residence in the last three years?

A  No.  For a married taxpayer to qualify for the $8,000 tax credit, both spouses must be “first-time homebuyers” as defined in Question 5.  In other words, neither spouse qualifies for the $8,000 tax credit unless both of them have not owned a principal residence over the last three years.

Q 14.  Are two unmarried individuals both eligible for the first-time homebuyer tax credit if they buy a house together?

A  Yes.  Two or more unmarried individuals can buy a principal residence together, but the maximum tax credit for all of them is only $8,000.  If all co-owners qualify as first-time homebuyers, they must allocate the $8,000 tax credit between themselves in any reasonable manner.  According to the IRS, a reasonable method is any method that does not allocate all or a part of the credit to a co-owner who is not eligible to claim that part of the credit (see IRS Form 5405).

For more information or additional questions please contact me.

Q 19.  What are the major differences between the new $8,000 tax credit and the previous $7,500 tax credit?

A  The $8,000 tax credit is $500 more and applicable to first-time homebuyers who purchase a principal residence from January 1, 2009 to November 30, 2009.  The $8,000 tax credit need not be repaid if the buyer stays in the property for 36 months.

On the other hand, the $7,500 tax credit applies to first-time homebuyers who purchased a principal residence from April 9, 2008 to December 31, 2008.  The $7,500 tax credit must generally be repaid over 15 years.

Q 20.  How does a first-time homebuyer apply for the tax credit?

A  A first-time buyer may claim the tax credit on their federal tax returns using IRS Form 5405, which is available at http://www.irs.gov/pub/irs-pdf/f5405.pdf.

FRANCHISE TAX BOARD OFFERS HELP TO FINANCIALLY STRESSED TAXPAYERS The Franchise Tax Board (FTB) is advising taxpayers facing income tax troubles to contact them to have a specialist review their account and explain available programs that offer assistance. FTB specialists can assist taxpayers by establishing payment plans, granting relief from state tax liens, or delaying some collection actions. FTB generally can grant relief from state tax liens within two weeks for financially distressed homeowners trying to sell or refinance their homes. When a home sells for less than the loan balance, FTB sometimes can remove its tax lien from the property to allow the homeowner to complete the sale. Tax liens typically must be paid before a real estate escrow can close. The tax lien remains in effect on any other property the taxpayer currently holds or later acquires.

FTB also can help individuals who are refinancing or modifying an existing home loan if homeowners request that the new or modified loan have priority over the tax lien. This allows prior home loans to be refinanced or modified without first having to pay the lien.

More information is available at http://www.ftb.ca.gov/index.shtml, including ways to help taxpayers resolve their accounts through installment agreement requests; go to http://www.ftb.ca.gov/online/eia/index.asp for more information. For lien information, look under the "Bills and Notices" tab.

Taxpayers who cannot resolve their accounts online should call the phone number listed on their billing notice. Taxpayers without Internet service may request an installment agreement payment plan by calling FTB at (800) 689-4776, Monday through Friday, between 7:30 a.m. and 6 p.m.

More info: http://www.ftb.ca.gov/index.shtml

FANNIE, FREDDIE ANNOUNCE MAKING HOME AFFORDABLE INITIATIVES Fannie Mae today began making two new initiatives, Home Affordable Refinance and Home Affordable Modification, available to its servicers and borrowers as part of the Obama Administration's Making Home Affordable program.

The two initiatives are designed to significantly expand the numbers of borrowers who can refinance or modify their mortgages to a payment that is affordable now and into the future. Details are available at http://www.fanniemae.com/newsreleases/2009/4631.jhtml;jsessionid=1AI52Q21C4Z03J2FQSISFGA?p=Media&s=News+Releases.

Freddie Mac also announced two new mortgage initiatives, tied to the Making Home Affordable plan, designed to help families with Freddie Mac-owned mortgages who are delinquent, at-risk of default, or struggling to refinance because of declining property values. 

The new initiatives include Freddie Mac's Relief RefinanceSM Mortgage and the implementation of the Obama Administration's new Home Affordable Modification program. Details are available at http://www.freddiemac.com/news/archives/servicing/2009/20090304_relief-refi-mtge.html.