The 2009 Federal Tax Credit:Buying A New Home After Divorce

Finally you and your ex spouse have worked out all the details. You both agreed that the best choice was to sell the family home because it was just too expensive for either one of you to keep. The next big question is what options do you have if you want to buy another home?

If you are fortunate enough to have equity from the sale of your old home, you may want to seriously consider buying another dwelling. Although the global and national economies have been hit the hardest since the Great Depression, believe it or not, this is the time to buy your next home.

Take a close look at the new $6,500 federal tax credit for move-up home buyers that passed the Senate and House November 2009. Though it's been getting second billing to the original $8,000 credit for first-time purchasers - now extended by Congress through June 30 2010- the $6,500 credit for current homeowners may be ideal for you.

The new credit is available now. It took effect the day President Obama signed the legislation creating it - Nov. 6 2009. This means that if you fit the key criteria - you've owned and resided in your current home for a consecutive five out of the past eight years, and your adjusted household income doesn't exceed $125,000 if you file taxes singly, $225,000 if you are married filing jointly - you can claim the credit as soon as you close on a qualifying house.

That could be next week, next month, or next spring. There is no "move up" requirement in the new credit. In fact, homeowners who plan to downsize into a smaller dwelling may prove to be significant users of the credit, along with people who are relocating because of employment changes or are going through a divorce and need to buy a new home.

If you fit the criteria and are considering buying another house in the coming year, you might want to speed up the process and sign a contract by April 30 and close by the June 30 2010 expiration date. Think of it this way: If the government is willing to give you $6,500 to act a little faster than you had originally planned, why not seize the opportunity?

Another key feature of the $6,500 credit program is that it requires that the house cannot cost more than $800,000.

The replacement house must become your main home but there is no requirement in the legislation that you sell your current home. You could rent it out, turn it into a second home, or list it for sale later in 2010 when prices might be higher. This latter option may be a great idea for divorcing parties who currently have a house that is "upside down" ( you owe more on the house than its worth).If you plan to retain your old home, make sure you move into your new home on the day you close so there is no question with IRS that the home was your principal residence at that time.

Like the first-time buyer credit, the $6,500 version permits a broad range of dwelling types for your purchase. These include newly constructed or existing single-family homes, condominiums, manufactured or mobile homes, and boats that function as your principal residence. Once again, a perfect remedy for those who want to continue to own a home after a divorce but need to get into a more managable property. You cannot claim the credit if you are buying a second home or an investment property.

There is more paperwork involved in this new phase of the Federal Tax Program to insure that the applicants are legitimate. The revised rules require taxpayers to submit copies of their settlement statements (HUD-1 forms), along with their requests for credits using IRS Form 5405. Congress' new rules also prohibit individuals younger than 18 or who are counted as dependents on another taxpayer's filings from claiming the credit.

Home buyers in 2009 - those who go to closing after Nov. 6 but no later than Dec. 31 can claim the $6,500 credit on their 2009 federal tax returns, or amend their 2008 returns. Similarly, eligible purchasers in 2010 will be able to file for the credit on their 2009 returns or 2010 returns. Talk to your tax adviser regarding timing decisions, which may be affected by your household income applicable to a given year.

If you aren't sure if you can make the deadlines established for the new credit - a binding contract by April 30 and a settlement by June 30 2010 - do not assume that Congress will provide another extension. The economy and housing market continue to slowly improve, with those glimmers of a better economic horizon, Washington wants to conclude these programs as soon as possible.

For an excellent consumer resource with frequently asked questions on both the $6,500 and the $8,000 extended credits, go to www.federalhousingtax credit.com, which is sponsored by the National Association of Home Builders.