Part of the current economic woes is attributable to a surplus of unsold houses.

In an effort to encourage first-time home buyers, the American Recovery and Reinvestment Tax Act of 2009 (the "stimulus package") has created a tax incentive.

For purchases of homes between Jan. 1 and Nov. 30, the credit is 10 percent of the purchase price, up to a maximum credit of $8,000.

To qualify, the buyer must not have owned and used a home as a principal residence for the three years preceding settlement.

While the credit is called "The First Time Home Buyer's Credit," in fact, you could have owned a home before as long as you did not own one during the three years preceding settlement on the new home.

For married couples, both spouses must qualify on the settlement date. Separation does not overcome the dual requirement, but divorce before settlement does. For example, if you have not owned a home in the past three years but your spouse has owned a home during that time period, neither you nor your spouse qualifies for the first-time home buyer tax credit.

Unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer. An example of this would be a parent jointly purchasing 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.

If the home is sold or ceases to be a primary residence within three years of settlement, the credit is recaptured.

To fully qualify, a single person must have a modified adjusted gross income (MAGI) of no more than $75,000, and a married couple must have a MAGI of no more than $150,000. MAGI is the amount on the bottom of page one of the 1040, plus certain foreign income.

The tax credit phases out and 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.

The new home may not be purchased from a close family member — a spouse, parent, grandparent, child or grandchild.

The closing date is the purchase date for considering eligibility. For new construction by a landowner, the first date of occupancy in the home is the date for considering occupancy. In other words, you could build a new home on land you already own and still qualify.

If you are building a home now, make sure you can beat the Nov. 30 deadline to qualify. Thanksgiving and hunting season can delay certificates of occupancy late in November, resulting in the loss of the $8,000 credit.

For those who bought a home in 2009, there is an option to use either the 2008 MAGI or the 2009 MAGI. This could make a difference if the buyer will be over limit in 2009 but had less income in 2008. An amended tax return for 2008 would have to be filed — a small effort for an $8,000 benefit. For those using the 2009 program, be sure to use the updated Form 5405 to file with your 1040.

You claim the credit on your 2009 federal income tax return, Form 1040. Complete IRS Form 5405 to determine the tax credit amount and then claim this amount on Line 69 of Form 1040. No pre-approval is necessary.

For those who want to get the money sooner than next spring, three options are possible.

One is to reduce withholding for the year to account for the anticipated extra tax credit. But be sure you don't overestimate the credit. Interest and penalties still apply to underwithholding.

Second, HUD has announced that it will allow FHA-approved lenders to issue short-term loans to advance the credit amount for use in purchasing the home.

Third, Pennsylvania Housing Finance Agency's Tax Credit Advance Loan Program (TCA) allows Keystone Home Loan and Keystone Home Loan PLUS borrowers to apply a portion of their 2009 first-time home-buyer tax credit toward the purchase of their home. The program offers an advance in the form of a subordinate loan to those filing the 2009 Form 5405 with their 2009 tax returns. The program will be available to home buyers on a first-come, first-served basis. Go to www.ncsha.org/uploads/tcalp.pdf for details.

Last year's program, which was enacted by Congress in July, was not nearly so generous. That program was in the form of interest free loans of 10 percent of the purchase price ($7,500 benefit maximum), given as a credit in the tax year of the purchase, with repayments at zero interest over 15 years. It is still available for purchases before repayment begins in the 2010 tax year and continues as an extra tax credit for the next 15 years.

This new 2009 program is significantly different. Because it had to be repaid, the previous 2008 "credit" was essentially an interest-free loan. The new program is a true tax credit.

E-mail: Patti@spencerlawfirm.com