I keep hearing about a “move-up tax credit” for repeat home buyers.

The odd thing is that such a thing doesn’t exist. Apparently, there’s a misconception suggesting that the Internal Revenue Service tax credit for repeat buyers only applies if we’re talking about a situation where a homeowner sells his house and purchases one that costs more money.

That’s not the case at all — and that’s a good thing. There are a number of buyers out there who are moving “down” for a number of reasons — their children have moved away from home, they’re tired of maintaining a yard, they’re economizing, etc.

The good news for those homeowners is that the tax credit exists for those buyers moving down as much as it does for anyone else. The IRS doesn’t care if a repeat buyer is moving up, down or sideways. As long as that buyer qualifies for the tax credit under federal law, a tax credit will be forthcoming.

IRS spokesman David Stell put it this way: You could move down from a $2 million mansion to a home that costs less than $800,000. As long as you meet the guidelines, you’ll get a tax credit.

What are those guidelines? First of all, the person claiming the credit must have owned a primary residence for five consecutive years out of the past eight. Also, the tax credit can only be claimed by people who purchased a primary residence after Nov. 6 last year and before May 1 this year, and close on it before July 1.

Furthermore, the tax credit does not apply for homes costing more than $800,000. Individuals making more than $125,000 per year and couples making more than $225,000 cannot claim the full credit, while individuals making $145,000 and couples making more than $245,000 receive no credit at all. Nonresident aliens can’t claim the credit, nor can people who can be claimed as dependents by other tax filers.

Also, the purchased home cannot be located outside of the United States, nor can it be purchased — or inherited — from a family member. The maximum tax credit that can be claimed is 10 percent of the purchase price of the home or $6,500, whichever amount is less.

Those are the major guidelines set out in the instructions for IRS Form 5405 — the form that must be filed by anyone wanting to take advantage of the credit.

Another misconception about the tax credit is that buyers must sell their “old” houses in order to claim a credit on the “new” ones. That’s not the case at all. The IRS only requires that the purchased home be used as the buyer’s primary residence.

In other words, you can keep your old house if you want. It can no longer be your primary residence, but you are free to use it as a second home, rent it out or give it to one of your children — that’s all up to you.

Of course, there’s also a tax credit of up to $8,000 available for first-time buyers. That credit, too, is covered at length in IRS Form 5405. Both the credit for repeat buyers and the one for first-time buyers expire soon. Anyone wanting to claim them must purchase a home prior to May 1 and close on it before July 1.

It’s a good thing there’s no “move-up” provision attached to the credit for repeat buyers. A lot of Arkansans are looking to downsize these days, and it’s not uncommon for people from other states to sell their homes, buy less expensive ones in Arkansas and still have some money to put in the bank after they move here.

House to House is distributed by the Arkansas Realtors Association.

More from columnist Ethan Nobles

This entry was posted on Sunday, February 28th, 2010 at 6:00 am and is filed under Ethan Nobles. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.