Is Home Refinancing Eligible for the Homebuyer Tax Credit?

Buying a house for first-time buyers from 2008 through 2010 resulted in an $8,000 tax credit.

Home refinancing is not eligible for the homebuyer tax credit. However, there are still significant benefits to refinancing. Often, monthly cash flow is improved because interest rates are at historic lows. In addition, points paid on an earlier refinancing can be deducted from federal taxes in full for the tax year when the old loan is paid off.

Eligibility

Refinancing often requires huge closing costs.

The first-time homebuyer tax credit was designed in 2008 to spur the real estate market by providing taxpayers with an incentive to buy. Originally, the tax credit was for first-time owners; later, the credit was broadened to include long-time owners. The credit for new homebuyers was $8,000. The long-time homebuyer credit was $6,500. Both credits expired in 2010. Neither credit was allowed for refinancing a property. A new owner-occupied property had to have been purchased from another owner in order to qualify.

Refinancing

In order to qualify for the credit, the buyer could not have owned the property associated with the credit. Therefore, refinancing a home did not count toward the homebuyer credit. Many homeowners refinanced in 2008, 2009 and 2010, as mortgage rates approached historic lows. Owners often had to pay significant closing costs in order to refinance. These closing costs combined with sinking real estate values made selling a recently refinanced house at a profit a difficult prospect.

Cash Flow

While refinancing a house did not allow a homeowner to qualify for the homebuyer credit in 2009 and 2010, there were significant benefits from refinancing. The major benefit was reduced monthly cash flow toward housing expenses. Rates dipped below 5 percent in 2010, saving many homeowners hundreds of dollars in monthly interest payments. In addition, the points paid on previous refinancing could be deducted from taxes once the new loan was in place. Normally, points are amortized over a much longer time period. While not a huge tax savings, this was a nice plus.

Warning

The IRS continues to be flooded with fraudulent first-time homebuyer tax credit claims. Owners who were not first-time buyers, owners who simply refinanced or owners who did not qualify for the long-time homeowners tax credit claimed the benefit. According to an October 2009 report in "The Wall Street Journal," in 2009 alone, at least 19,000 tax filers claimed the credit when they did not buy a home. Another 74,000 claimed the credit even though they were not first-time homebuyers, before the expanded program took place.

References

• SmartMoney; Tax Tips: The Benefits of Refinancing; Bill Bischoff; April 2010
• "Bloomberg Businessweek"; Who Qualifies for New Homebuyer Tax Credit; Prashant Gopal; November 2009
• "The Wall Street Journal"; First-Time Fraudsters; October 2009

Resources

• IRS.gov: First-Time Homebuyer Credit