Sound Mortgage Planning Blog

Here is  a brief overview of the new tax credit for First Time Home Buyers:

• The tax credit is for people buying their first home
• To qualify for the full $7,500, individuals must earn less than $75,000 annually, while couples may earn up to $150,000.
• Individual buyers with income of up to $95,000 and couples with income up to $170,000 are eligible for a partial credit.
• First Time Home Buyers represented about 20% of the market for new homes in 2007.
• The industry has had success with tax credits in the past. In 1975, Congress passed a $2,000 credit for home buyers (about $8,200 in today’s dollars).
• Buyers flocked to the market and cleared out a then-record inventory of homes.

How it Works

• Buyers who have not owned a home in the past three years can take a tax credit worth 10% of a home’s sale price, up to $7,500, whichever is smaller.
• The credit is good for homes closed on or after April 9, 2008 and before July 1, 2009, and can be taken on taxes filed during 2008 or 2009.
• Unlike tax deductions, which only offset taxes by lowering taxable income, the tax credit is a straight dollar-for-dollar deduction of your tax bill. So a buyer who would ordinarily pay $8,000 in taxes would pay just $500.
• It’s also “refundable,” which means if a buyer’s taxes are less than $7,500, the government will send them a check for the difference. For example, if a couple’s income generates a tax bill of $5,000, the government will refund all of that plus $2,500.
• Buyers must start paying back the loan within two years, at a rate of no more than $500 a year for 15 years. When the home is sold, any outstanding balance will be repaid from the profit; if it’s sold at a loss and the difference will be forgiven.

Caveats

• This does not provide the first-time borrower with cash up front.
• The borrower applies to get the credit after the fact.
• This results in a delay before the first-time buyer gets the financial advantage.
• It may have the appearance of being free money. It’s not.
• This is a loan from the IRS.
• It's important to understand that while this is a tax credit upfront, it will be a tax obligation down the road.

*Please know that I am not a tax advisor or tax consultant. Please contact your professional tax advisor or consultant if you have questions about the ‘tax credit’.

Resources: CNNMoney.com-Les Christie "Beware the $7,500 'tax credit' 08/18/2008, The Providence Journal-Some questions, answers on tax credit for homebuyers-Michelle Singletary, The Washington Post 08/18/2008.