If you bought a home in the first part of 2010, you may be eligible for a hefty tax credit that should not be overlooked when you prepare your 2010 tax return.

The original homebuyers' tax credit, which expired in 2009, covered only first-time buyers. When the law was extended, it was expanded to include not just first-time buyers, but also long-time residents who buy a new principal residence.

If you fall into that category, you may be eligible for a credit of 10 percent of the purchase price up to a maximum credit of $6,500. A long-time resident is an individual who, with his or her spouse if married, has owned and used the same home as a principal residence for any period of five consecutive years during the 8-year period ending on the date of purchase of the new principal residence for which the credit is being claimed.

Income Limitation

The full credit will be available to taxpayers with a modified adjusted gross income (MAGI) up to $125,000, or $225,000 for joint filers. MAGI is your adjusted gross income plus the total of certain foreign earned income.

Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

No credit is available if the purchase price of a home is more than $800,000; and a purchaser must be at least 18 years of age on the date of purchase. To claim the tax credit, the taxpayer must used Form 5405.

Taxpayers who bought homes in 2009 or 2010 and sold them within a 36 month period that begins on the purchase date, must repay the credit. They also must repay the credit if they convert the home to a business or rental property or the lender forecloses on the home.

The taxpayer repays the credit by including the amount of the credit as additional tax on the tax return for the year in which the repayment event occurs.

However, taxpayers do not have to repay all or a portion of the credit under the following circumstances:

  • Taxpayers sell the home to someone who is not related to them, the repayment in the year of sale is limited to the amount of gain on the sale;
  • If the home is destroyed, condemned, or disposed of under threat of condemnation and the taxpayer acquires a new principal residence within 2 years of the event, the taxpayer does not have to repay the credit; and
  • If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit if required.