Existing home sales jumped in September as new homeowners scrambled to cash in on the first time home buyers’ tax credit. According to the National Association of Realtors (NAR) sales jumped 9.4% nationwide compared to August. This is the biggest sales increase since July of 2007. In an NAR study, first time home buyers have been responsible for 45% of all home sales this year.
NAR President Charles McMillan points out that it’s a great time to buy “Homes are selling for less than replacement construction costs in much of the country.” Sales of distressed homes accounted for nearly one out of three sales in September.
Lawence Yun, the NAR’s chef economist says that “The rising sales momentum needs to continue for a few additional quarters until we reach a point of a self-sustaining recovery.” He adds “Home values could soon turn consistently positive and help the broad base of middle-class families, but we are not there yet.” The NAR is calling for an extension of the $8000 tax credit which is due to expire November 30th.
The first time home buyer tax credit is for anybody earning less than $75,000 in adjusted gross income, who has not owned a principal residence in the past three years. It is for 10% of the purchase price of a principal residence up to a maximum of $8000. For homeowners earning more than $75K the credit diminishes until it fades out at $95K. Double these income limits for married taxpayers.
The best part of the credit is that unlike the tax credit offered by the Bush administration it does not have to be paid back. In fact it is fully refundable, so if new homeowners don’t owe the amount of the credit in taxes, they get government checks for the balance. Congressional analysts estimate that the credit is costing the US Treasury $1 billion a month.
For credit advocates, news this past week from the House Ways and Means Subcommittee on Oversight was discouraging. Chairman John Lewis, D-GA, said he was concerned about fraudulent schemes involving the credit.Some had taken the credit for simply considering a home purchase. Linda Stiff, deputy commissioner of the IRS, testified, “We’ve had indications on 115 cases of potential schemes involving about 8,000 taxpayers and tax returns that are currently under criminal investigation.” At least 19,000 buyers had already owned a home. 582 new homeowners were under the age of 18. One was 4 years old. These children did meet the income limits, and none of them had ever owned homes before. Although these kids were unable to sign legally binding contracts, they claimed almost $4 million in tax credits.
Yesterday, the IRS announced its first successful fraud prosecution over the first time homebuyer credit. The feds accused James Otto Price III, a Jacksonville, FL tax preparer of filing bogus tax returns for 35 clients. Thursday Price pled guilty to falsifying a federal tax return to claim the credit. He faces up to three years in jail, a fine of $250,000 or both.
The Obama administration is not enthusiastic about extending the tax break, so if you are considering the first time purchase of a home, look now. You only have until the end of November to qualify for the credit.