The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

1. Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

2. What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

3. How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

4. Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

5. What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous “credit” was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

9. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.

10. What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

11. I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

12. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

13. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

14. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

15. I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.

16. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.

17. Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

18. I bought a home in 2008. Do I qualify for this credit?

No but look into the $7,500 tax credit for qualified first-time home buyers in the Housing and Economic Recovery Act of 2008 which includes a number of other provisions that will help prevent foreclosures, reinvigorate the housing market and strengthen the nation’s economy.

19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment.

Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a down payment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

20. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose (”elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.

21. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?

Yes. If the applicable income phase out would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

Become a savvy investor on your own. In a recent month some 7500 homes were sold in Maricopa County. While that number is certainly way below “boom” months, it’s a factor worth considering and it means that homes ARE being purchased and sold. People are taking advantage of opportunities. And, the same is true of national markets. Homes are being sold. Another point to consider is the old mantra of “location, location, location.” Even here in Arizona, and particularly Maricopa County, there are many neighborhoods where sales are taking place, and home prices have not fallen a great deal year over year. Yes, there are neighborhoods where not much action is being seen, but still some areas are experiencing steady movement. How can you spot these locations? It’s really a page out of Real Estate 101. Spot clean neighborhoods where people are taking to each other; where children walk to school. maybe even with their parents; where there are too many cars parked along cluttered streets or sides of homes; where grass is kept mowed and trimmed; where you’d feel good living. You’ll often find that crime is lower in such locales as well.

With GoRealEstate INVESTOR, the investment arm of GoRender.com, LLC, We Have A Long List of Tips & Criteria To Evaluate Properties. Call us today at 602-512-4400 or visit our site at GoRealEstateInvestor.com
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Question:  With the recent change in the housing market, where is the growth right now?  What types of properties should I be looking for as an investor?

Answer: The real estate market shifted dramatically in the last 18 months. And I think it really just serves to highlight the old adage, the more things change, the more things stay the same. Even after last year’s phenomenal growth I continue to be bullish and excited about Arizona real estate. Have my buying criteria changed? Yes. I think the recent growth presents some new and different opportunities that weren’t there two years ago. I do, however, still feel that single-family homes are the bread and butter that should form the bulk of the average investor’s portfolio.

Follow the Money

Three significant changes have occurred over the past year, however, that I think warrant mentioning. First, so much wealth was created in real estate last year that I think there will have to be a new outlet for that wealth through real estate. I know quite a few of my investor clients and partners realized several million dollars of growth last year. That new wealth base, combined with the amazing growth of Maricopa County over the past few years has led to a new age of commercial investors.

These commercial investors are taking advantage of ownership and acquisition flexibility that didn’t exist just a few short years ago. Office condos and other opportunities such as TICs have made high-end commercial investments available to a smaller investor. And the smaller investor has greater resources than ever following last year’s value increase.

That’s why I recently refocused much of my personal portfolio into high-quality commercial projects. I believe that the right commercial investment will be my highest performing assets over the next 4 or 5 years. It’s been a while since commercial values really jumped in the Valley, and I think we are at the very tip of that movement after last year’s residential run.

Plus, we finally have the local wealth base to fund the commercial growth that is so overdue. Even those homeowners that don’t directly invest their newfound wealth into more real estate will indirectly contribute to the new commercial growth. More and more consumers are refinancing their homes and taking equity out for consumer spending. And while I’m not a huge fan of this practice, it is helping to drive local commerce and creating expanded business opportunities for new and existing business. This, again, supports the commercial growth I project over the next 4-8 years.

Hot Spot, Anyone?

A second interesting trend I am watching closely and invested in heavily are some of the very attractive satellite markets to Phoenix. My absolute favorite of these markets is in Prescott. Just and hour away and much cooler, there has been spectacular growth in the Prescott Valley. More and more Californians and Arizonans alike are purchasing primary or secondary residences there.

Those are all great indicators. Add to that the fact that the area is surrounded by forest service and BLM land that cannot be developed and I can’t help but think that Prescott could be our next Sedona. Look at what happened to property values in Sedona once they ran out of available land to develop. The value surge was spectacular. I envision that Prescott will follow a similar path as development space and resources become more limited.

For now Prescott is a briskly growing community with very attractive fundamental indicators. It’s still ahead of the curve, however, because once the land starts tightening up the values should spike dramatically. It’s a good value if nothing changes. It’s a home run if I’m right.

Follow the Money, Part II

The last change in what I’m advising my clients to acquire is directly related to the value growth of the past year. As home prices grew it created something of a dead spot in the market at the low end of middle class housing. This is the area of housing that was most affected by investors in the last two years. Lots of smallish single-family homes are sitting stagnant on the market right now because there is so much product available and not enough buyers to take up the slack.

I think a lot of people are disappointed with what $200,000 – 275,000 buys them these days in a single-family home. Housing values have grown significantly, but right at that median home price you have a segment of the market where their wages haven’t caught up yet. And that’s why I have changed my investing criteria at that level.

I am still investing in quality-single family homes above the $400,000 price point. I think they will continue to do well. However, at about $325,000 and below I think a higher-end condo will outperform a similarly priced house for the next several years. Combine that with other factors, such as rising fuel prices, and some of the nice condo developments with great locations become even more attractive.

In the past I’ve always held that I’d rather have a quality single-family home and have never invested in condos at a high level. Recently I see a large gap in the market that can only really be filled by the luxury condo market segment. And I like it. I am, however, much, much more particular when condo investing.

Money Where My Mouth Is

To be clear, I am firmly of the opinion that real estate investment in quality properties will continue to be a very lucrative investment. It will be different from the past few years, but you just have to know what to acquire.

I am acquiring Class A office condos in strategic locations, quality single-family homes $500,000 and up in Maricopa County and Prescott and higher-end condos below my single-family threshold. It’s a strategy I think will return phenomenal results for the next phase of the real estate market.

Question:  I have been a real estate investor for several years now.  I own 11 residential properties and I am considering investing in commercial properties for the first time.  What are the primary differences between commercial and residential investments?

Answer: First of all, I think you’re making a wise investment decision. I think the commercial growth and returns over the next decade will be outstanding. As far as the differences go, there are many. I wouldn’t let that dissuade you from your commercial investment aspirations, but you would be well served to seek a knowledgeable mentor to walk you through your first transactions. You’re probably going to use the services of a real estate agent anyway so you may as well get the services of a qualified expert…it doesn’t cost any more (seller pays) and you’ll be way ahead of the game.

Since I don’t have the space here to adequately cover all the differences, I’ll highlight a few of the bigger ones. Use this as an introduction and ask your qualified agent to go into more depth with you. Commercial investing is exciting and financially rewarding; however you’ll have more responsibility for making your investments work.

Right off the bat you’ll probably realize that commercial investments are valued differently than residential. Residential properties are typically valued according to recent home sales in the area. Whether you have a tenant or not makes little difference to a residential property value.

Most commercial properties, however, are valued using some form of return-on-investment criteria. This could be a capitalization (cap) rate, which is very common, a gross rent multiplier (GRM) or various other ways. Cap rate is probably the most common. Simply speaking, the cap rate is the whole-dollar cash-on-cash return on investment each year after operating expenses and before financing costs.

What this means is commercial investments are much more sensitive to the quality of the tenant, rent rates, vacancy rates, lease terms, etc. Generally speaking, commercial investments should have positive cash flow from the beginning and will be valued accordingly. Sometimes the properties will be sold according to projections, replacement cost, etc., but whether you are acquiring a new office condo or a tenanted industrial warehouse, you’ll definitely want to do your homework on the various valuation techniques so you can truly understand your ROI.

Once you are past the valuation you’ll find that financing is significantly different than residential financing. That’s both good news and bad news.

On the one hand, commercial lenders will be more interested in the investment opportunity than your personal credit worthiness. Of course, with a residential loan it is the reverse of that…your personal ability to qualify is of paramount importance. Many investors are surprised at the size and quality of the commercial investments they can qualify for because you’re letting the property do the qualifying.

On the other hand, you’ll likely need to come up with substantially more money to acquire the commercial property. Most commercial lenders will require a minimum of 25-30% down on a non-owner-occupied property and will amortize the loan for just 25 years. Most commercial loans are adjustable and will have a balloon payment that causes most owners to refinance fairly regularly. I don’t view this as a negative, just something to take into account.

If you’re a small-business owner, however, you have some excellent advantages available to you. If you are purchasing a building for your business you may be able to get SBA or bank financing for as little as 10% down. There are various requirements for how much space your business must use, but that’s a great way to grow the value of your business by buying more than you need and leasing the additional space to other businesses. Small business owners should definitely check out the possibilities for owning their own real estate. It’s a great investment. If you don’t think you can afford it make sure and talk to an investment expert that can show you other options, including business lease-purchase programs.

Residential property values ebb and flow very slowly and typically rise with middle-class over time. They are consistent and follow relatively predictable trends historically. Your commercial investments will usually be more sensitive to economic conditions and local business health. In a down economy you may have to sustain extended or unexpected vacancies. Your carrying costs will be higher and you need to account for this in your investment plans.

While that may be a turnoff for some, I think it is more than offset by the positive cash returns, significantly longer tenancies (often decades), automatic rent increases and revaluations, lower maintenance requirements and higher-quality tenants (businesses instead of individuals).

Stick with your strategy. There is definitely an education involved, but the returns and expanded opportunities will be well worth it. Find a great mentor and go for it!

Question: I want to make sure that my tenants take good care of my property so I don’t allow pets or smoking and I prefer they not have small children. What else can I do to assure my tenants don’t damage the property?

Answer: Those of you that read my column yesterday know this is actually the second part of this article. I promised I would touch more on the subject of “babysitting” tenants, and here it is. The question’s different, but the same principles apply. First off, although this isn’t directly related to the general topic we’ve been discussing, you should know that it violates fair housing laws to disallow tenants based on familial status. You shouldn’t show a bias against families with small children.

The other part of your question, however, is what I want to discuss. My opinion is that it’s not a good idea to restrict smoking or pets in your rental property. And just so we’re clear, this doesn’t have anything to do with my personal preferences. It’s just an investment decision.

Stay Focused

As an investor you have to learn to focus on the investment, not your personal preferences. I wrote yesterday about how it doesn’t work to babysit your tenants. They’ll resent it at best and leave at worst. Babysitting, in the long run, negatively impacts your investment returns. You may still want to control your tenants, but you should really learn to just get over it.

The smoking and pet question falls into this same category. I’ll share my experience with this. First, I know I’ve turned away a lot of qualified tenants simply because they had a pet or someone smoked. 20-20 hindsight tells me I would have rather had a great tenant with a pet than a lousy tenant without one. This is an investment. Focus on finding a tenant that will make your investment work for you.

Here’s something else I found…most tenants will tell you want they think you want to hear. I don’t think this makes them bad people (we all do this to some extent), but don’t kid yourself. They will be as positive as possible when it comes to stating their income, past rental history, etc. They will also tell you they don’t smoke and have no pets if they think that will negatively affect their ability to qualify.

I want to give my potential tenants every opportunity to be honest with me. The more accurate information I have, the more effective I can be at determining what it will take for my investment to work. For example, if my tenants know I have a no pet policy they are more likely to say they have no pets. That doesn’t mean everyone will lie, simply that I am creating pressure for them to be less than honest. I am far better off telling them I allow pets and create a space for them to be honest. Then I adjust my lease agreement to accommodate their situation. Once I know the truth I can perhaps charge additional security deposits for pets and at least make an informed investment decision.

The same applies with smoking. I would rather know and have additional cleaning deposits than not know and leave my investment exposed to unknown risk. It’s a simple investment decision.

Let Go

Stop trying to judge and control the way your tenants live their lives. It’s somewhat amusing to me the number of investors that come into my office with all kinds of judgments about renters. They assume renters are irresponsible people who don’t take care of things either physically or financially. First off, I can just about promise you that if that’s what you believe it’s probably also what you’ll get. Second, I can tell you that it just isn’t true.

This may sound odd, but I love my tenants. Even when I disagree with some of the decisions they make, I love my tenants. For one thing, I believe loving them is a better way to live than stressing about them. Also, my tenants have allowed me to experience phenomenal returns with my investments. And those returns never truly skyrocketed until I stopped judging them and just let them live their lives.

At the end of the day, what I want is a tenant who keeps their word and pays rent. Yes, I would like for them to care for my investment the way I would, but I can’t control that so I’m not going to expend any energy trying. If they don’t pay, they don’t stay. If they do pay, I just want to do what I can to keep them there. I want to make their lives easier, not harder.

Next Please

I’m somewhat famous around the office for my low-energy approach to tenants and problems. I know my investments are working for me. Sure, there are hiccups and unexpected events that come up. But I’m too busy focusing on the positive to worry about the negative. In fact, as most people who know me have heard, I’m all about “Next Please.” That’s my phrase for when faced with those inevitable surprises in my investing. “Next Please.” I move on and make the best decision I can make for my investments.

One thing I know doesn’t work, judging or punishing my next tenants because my last tenants had a dog that scratched up the back door. I just want to make the best investment decision I can make. You would do well to do the same.