First-Time Homebuyer closing costs-401K withdrawal

First-Time Homebuyer Expenses. The 10-percent additional tax does not apply if the individual uses the IRA distribution for certain expenses of a first-time homebuyer. Only $10,000 during the individual's lifetime may be withdrawn without a penalty for this purpose. Qualified expenses include acquisition costs, settlement charges and closing costs. The principal residence may be for the individual or the individual's spouse, child or grandchild, or an ancestor of the individual or the individual's spouse. In order to be considered a "first-time homebuyer," the person buying the residence (and spouse, if married) must not have had an ownership interest in a principal residence during the two-year period ending on the date that the new home is acquired ( Code Sec. 72(t)(2)(F)). 165

Bill takes a hardship distribution from his 401(k) plan on April 1, 2011. In order to satisfy one of the safe harbor requirements, Bill will not be able to make any elective deferrals or after-tax contributions to the plan until October 1, 2011 (i.e., six-month suspension of contributions).

Primary Residence-Capital Gain Exclusion

Generally, the home one lives in most of the time is one’s principal residence; it can be a house, houseboat, mobile home, cooperative apartment, or condominium.
In order to exclude gain on the sale of a home, a taxpayer generally must have owned and lived in the property as his or her main home for at least two years during the
five-year period ending on the date of sale. The maximum gain that can be excluded is $250,000 for individuals and $500,000 for married couples filing jointly.

IRA to Roth Conversion

The $100,000 modified adjusted gross income limitation and the joint return limitation are repealed for tax years beginning after 2009. Code Sec. 408A(c)(3). Thus, a taxpayer can convert an eligible retirement plan to a Roth IRA as long as the amount contributed to the Roth IRA satisfies the definition of a qualified rollover contribution.

A taxpayer has a traditional IRA with a value of $100, consisting of deductible contributions and earnings. He does not have a Roth IRA. The taxpayer converts the traditional IRA to a Roth IRA in 2010. As a result, $100 is includable in gross income. Unless the taxpayer elects otherwise, $50 of the income is included in income in 2011 and $50 in 2012. Later in 2010, the taxpayer takes a $20 distribution, which is not a qualified distribution and all of which is attributable to amounts includable in gross income as a result of the conversion. Under the accelerated inclusion rule, $20 is included in income in 2010. The amount included in income in 2011 is the lesser of $50 (half the income resulting from the conversion) or (2) $70 (the remaining income from the conversion), or $50. The amount included in income in 2012 is the lesser of $50 (half the income resulting from the conversion) or (2) $30 (the remaining income from the conversion, or $30.

Mortgage Debt Forgiveness

If you still have mortgage liability after foreclosure, any amount forgiven by the lender is generally ordinary income. However, for debt discharged on or after January 1, 2007, and before January 1, 2013, the debt forgiveness is treated as tax free if the property is your primary residence. The limit on qualifying debt is $2 million ($1 million for a married person filing separately).

Interest and Property Taxes

Home mortgage interest on up to $1 million ($500,000 if married filing separately) of home acquisition loans secured by your principal residence and/or second home is fully deductible. You also may deduct mortgage interest on a home equity loan or line of credit up to $100,000 ($50,000 if married filing separately). Therefore, you can deduct interest on total home debt up to $1.1 million ($550,000 if married filing separately).

First-Time Homebuyer Credit

The First-Time Homebuyer Credit increased to $8,000 in 2009 and is generally available for purchases made between January 1, 2009, and May 1, 2010, provided the home is occupied as the buyer’s principal residence within 24 months of the purchase. (Note: A first-time homebuyer is defined as someone who has not owned a principal residence in the three years before the purchase.) For purchases made after November 6, 2009, no credit is allowed if the purchase price exceeds $800,000. The credit only needs to be repaid if the home is sold within 36 months of the purchase date. For purchases made on or before November 6, 2009, the credit phases out for taxpayers with modified AGIs in excess of $75,000 ($150,000 for joint returns). The credit is refundable and recaptured if the home is sold within 36 months of the purchase date. For purchases made after November 6, 2009, the phase out starts at modified AGI of $225,000 for married taxpayers and $125,000 for all other taxpayers. The credit is completely phased out at modified AGI of $245,000 for married taxpayers and $145,000 for all other taxpayers.

Credit for First-Time Homebuyers-Extended and Expanded

If you buy a house in 2009 before December 1, you may be eligible for the newly expanded First-Time Home buyers Credit. This credit, which was to expire June 30, 2009, has been extended through November 30, 2009 — and has been made significantly more attractive. You can now claim $8,000 (up from $7,500)or 10 percent of the purchase price, whichever is lower. If you are married and file a separate return, however, the most you can claim is $4,000 (up from $3,750). As under prior law, the credit is phased out for taxpayers with adjusted gross income over $75,000 ($150,000 for married taxpayers filing jointly).

Comment
Perhaps more significant is the fact that the credit is no longer treated as a zero-interest loan that must be paid back over 15 years. Instead, the credit needs to be paid back only if, within 36 months of purchasing the home, you either sell it or you (and your spouse)stop using it as your principal residence. Even though the credit is available for houses purchased in 2009, you can claim the credit on your
return for 2008 by electing to treat the purchase as occurring in 2008. This election will not affect the application of the 15-year repayment provision — it
will not apply to purchases in 2009 even if they are treated as occurring in 2008 for purposes of claiming the credit in 2008.

The credit can now be claimed for the purchase of a residence financed by the proceeds of a mortgage revenue bond. For residents of Washington, D.C., this credit is now the default credit, instead of the $5,000 credit solely for D.C. fi rst-time homebuyers. Under the prior law, D.C. homebuyers were entitled to the D.C. credit, not the first-time homebuyer credit. However, no first-time homebuyer credit is available to any taxpayer who claimed the D.C. homebuyer credit in any prior year.