Time Your Closing Right To Save Thousands

NOVEMBER 6 UPDATE: President Obama signed the legislation discussed in this story this morning, so the new credit for move-up buyers will be available for deals that are closed after today. Home buyers who qualify for the credit and are scheduled to close November 6 should consider postponing. The delay could put $6,500 in your pocket. Also, the higher income limits in the new law apply to first-time home buyers who close beginning November 7. That means some first-time buyers who thought they earned too much to get the credit will be pleasantly surprised by an $8,000 windfall.

It’s split-personality time in the housing market.

First-time home buyers are scrambling to make sure they close on their new digs by November 30, so that they can qualify for the juicy $8,000 first-time home buyer tax credit.

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At the same time, homeowners who are ready to move up to a new house may have good reason to drag their feet. Legislation moving rapidly through Congress would create a $6,500 tax credit for current homeowners who buy a new place to live . . . but only if they close on the deal after President Obama signs the bill into law.

(Editor's note: See below for more details on the proposed move-up credit and extension of the credit for first-time buyers.)

That puts move-up buyers who are scheduled to close within the next few days in a bind. What should you do?

First, see whether you’d qualify for the new credit if the legislation passes and is signed by the President (which we think is likely). If so, contact your agent right away to see if closing can be delayed.

That’s exactly what Ronald Phipps, a Realtor in Warwick, R.I., says is going on in his bailiwick and around the country. “I am familiar with a couple of agents who have gone back to the seller and are negotiating to extend the closing for a week or ten days to see if we get this new credit,” he told Kiplinger. “If you can put $6,500 into a client’s pocket, then you’re going to try to do that.”

Phipps, first vice- president of the National Association of Realtors, says he and other agents are being “extremely cautious” in talking about the new credit, since because it’s impossible to know for sure whether it will be created and, if so, exactly how big it will be and who will be eligible. But the plan tacked on to legislation that would extend and expand unemployment benefits seems to be on a fast track to approval.

Negotiating a Delay

Let’s be frank: Postponing closing on a home can be a hassle. If your lease has expired or you just sold your home, for example, you may need a place to live or, if you’re renting back from a buyer, maybe you’ll need to extend your occupancy. Or the seller may need the money you’re scheduled to hand over in order to buy his new home.

Phipps notes that there’s often a domino effect with home buyers and sellers. But with thousands of dollars on the line –-- for you and, perhaps, for the sellers who are also buying a new home that would qualify for the proposed credit –-- a bit of hassle might be well worth it.

The key is to get all the parties involved talking as soon as possible. The legal issues involved in a postponement will depend on state law and the language in the contract. Your agent should be able to help you here. Be sure to check with your lender to see how a delay might affect the loan commitment or locked-in rate. Sellers may ask for concessions if they accommodate a delay that will open the door to a valuable tax credit for you.

The next few days could be a time of high anxiety for home buyers. “We’re talking shelter,” says Phipps. “We’re coming up on the holidays and the question is, wWhere am I going to have Thanksgiving dinner this year?”

We’re confident that this issue will be settled long before Turkey Day and, if you capture an unexpected $6,500 tax credit, you’ll have one more thing to be thankful for.

How the New Move-up Home-buyer's Credit Would Work

As proposed in legislation moving through Congress, the new credit would be available to long-time homeowners, defined as those who owned a home for at least five consecutive years out of the eight years prior to buying a new home. (If you sold your most recent home more than three years ago –- and thus don’t meet the five-out-of-eight-year test –- you can qualify for the larger first-time home-buyer credit even though your next home really isn’t your first home.)

The expanded credit is 10% of the home’s price, up to a maximum credit of $6,500. It will not be available for any home that costs more than $800,000. Like the current first-time home buyer credit, this one does not have to be paid back as long as you live in the house for at least three years. And, you must use the house as your principal residence, not as a rental or vacation property.

The right to the credit will be phased out at higher income levels, gradually disappearing as adjusted gross income rises between $125,000 and $145,000 for single taxpayers and heads of household, and between $225,000 and $245,000 for married couples filing joint returns.

If the credit becomes law, it will likely be effective for sales that are closed after the day President Obama signs the legislation into law. It will remain available for sales on which binding contracts are signed before May 1, 2010, that close prior to July 1, 2010.

If the credit is created and you buy a qualifying house during 2009, you will be allowed to amend your 2008 federal income- tax return to claim an instant refund of the $6,500. Or, you could claim the credit when you file your 2009 return next spring. Those who buy in 2010 will have the choice of claiming the credit on either their 2009 or 2010 tax return.

First-time Home-buyer's Extension

Even in the unlikely event that opponents succeed in blocking the expansion of the buyers credit to current homeowners, we expect Congress to extend the current $8,000 first-time home buyer credit beyond the current November 30 expiration date and to extend the credit to taxpayers with higher incomes than are currently eligible.

Legislation moving through Congress would extend the credit to cover qualifying purchases for which binding contracts are signed before May 1, 2010, and that close prior to July 1, 2010.

(Eligibility for the current credit is tied to closing on a home no later than November 30.)

The current credit phases out as adjusted gross income rises between $75,000 and $95,000 for singles and heads of household, and between $150,000 and $170,000 for married couples who file joint returns. To expand the pool of potential buyers qualifying for the credit, the proposed legislation would increase those phase-out zones to $125,000 to $145,000 and $225,000 to $245,000, respectively.

(The higher limits would apply to closings after the day Obama sign’s the bill -- —which means some buyers who thought their income was too high for the credit could enjoy an unexpected windfall.)

As with the current credit, the extended credit would be based on 10% of the purchase price, with a maximum credit of $8,000. The credit would not be available for any home purchased after enactment that costs more than $800,000.

There would be no change in a qualifying buyer’s right to claim the credit on the tax return for the year prior to the year of purchase. So, if you bought a qualifying home in 2009, you could claim the credit on an amended 2008 tax return and get an instant $8,000 tax refund. Or, you could claim the credit on your 2009 tax return next spring.