I often get asked how the homebuyer tax credit works. It’s at times like this I remember that not everyone lives and breathes real estate like I do and maybe it would be helpful to just break it down in a post.

So the first thing you need to do is establish whether you qualify for the tax credit. You probably have an idea already. If you’re not totally sure you can check by looking at the FAQ’s on the IRS website. It’s recently been updated to include info on the new expanded homebuyer tax credit that includes repeat buyers.

Now I’m going to state the obvious and tell you that you need to buy a home. Already here there is some confusion with some folks who think you can claim the tax credit before you buy a home. That is not the case. You absolutely need to close on a home before you can claim the tax credit. The current requirement is with the new extended tax credit that you have an accepted offer on a home by April 30, 2010 and that you close on that home by June 30, 2010.

So now how do you go about claiming the tax credit? What happens is that you file your taxes as usual and fill out the form 5405 claiming the amount you qualify for. Unfortunately it is not possible to file your taxes electronically in 2009 as the IRS has tightened its procedures.  If you filed your tax return in 2008 and claimed the first time homebuyer credit you didn’t need to provide proof that you had bought a home (!!) That changed with the new extended tax credit and it will now be necessary to submit the settlement statement, (HUD), that you sign at closing.

Now comes the big question. What do you do if closing is AFTER April 15, 2010, the deadline for filing your 2009 tax return? Easy answer: Hold off on filing your taxes and request an extension. The extension will give you all the way up to October 15 to file your 2009 tax return. Plenty of time, since one way or another you need to buy a home by June 30 anyway. If filing an extension sounds like a hassle, take it from me, it isn’t. My son did it last year at Taxslayer.com and it went as easy as 1-2-3.

One last thing I want to point out is that this is a refundable credit. What that means is that if the amount of the tax credit exceeds your tax liability you will get a check in the mail for the difference.

Keep in mind that I help clients buy and sell real estate in the Iowa City, Coralville and North Liberty area. Please let me know if you have any questions.