Summing it all up: New Tax Credit For "First Time Home Buyers"

Many of you by now have heard of the recent Housing Bill (H.R. 3221) that was signed by President Bush on July 30th, and goes into effect on October 1st, which made a $7,500 Tax Credit available to "First Time Home Buyer" who purchase a home between April 8, 2008 to July 1, 2009. A first-time homebuyer is defined as an individual who has not had an ownership interest in a principal residence in the previous three years. There is an income limit for individuals with adjusted gross income of no more than $75,000, and $150,000 on a joint return. Individuals with incomes greater than the $75,000 or $150,000, can still receive a partial Tax Credit if their individual income is below $95,000 and below $170,000 a joint return. This Tax Credit is also only available for a principle residence and is not available for investment properties, and the property must be located within the United States. Properties outside the United States are not eligible.

The Tax Credit works like this, if the "First Time Home Buyer" was going to receive a $1,000 refund when they file their Federal Tax Return in 2009, they will now be eligible for an additional $7,500 if they choose to receive it (it is not mandatory to receive the new tax credit, the First Time Home Buyer can decline to receive it). This means that their tax return will be $8,500 instead of $1,000. Likewise if they were going to have to pay $1,000, they would now receive $6,500.

This new Tax Credit is not a $7,500 gift, because it must be paid back within 15 years, however, it is interest free. The statute specifies that the repayment amount will be 6.67% of the credit amount each year. Thus, a buyer who qualifies for the full $7500 credit will repay a minimum of $502.50 each year starting with their 2010 tax return (which will be filed in 2011). If the purchaser sells the house before he/she has totally paid back the Tax Credit, the remainder will be due at the Closing and reduced from the proceeds of the sale. For example, if an individual still owes $3,000, and makes $30,000 on the sale of the house, the $30,000 profit will be reduced to $27,000 and $3,000 will be sent to the IRS.

There is an exception. "First Time Home Buyers" who meet the income requirements for this new Tax Credit, but who have a mortgage that is funded by "Tax Free Bonds", like the Connecticut Housing Finance Authority (CHFA), here in Connecticut, DO NOT qualify for the new Tax Credit. So a "First Time Home Buyer" needs to take this into consideration. What is more of a benefit to them, the low interest rate that CHFA offers, or the opportunity to receive a Tax Credit of $7,500.

Some of the initial advantages that I see that a "First Time Home Buyer" can gain from this new Tax Credit are:

• Mom and Dad might want to help with the purchase of the house, but don't want to outright give them the money. They now could quickly give Mom and Dad back up to $7,500 when they receive their tax return.

• Downpayment tends to be a big problem for "First Time Home Buyers", and most do not like taking money from their 401K's to come up with the money. Well now they could borrow the money from their 401K, knowing that they could quickly pay up to $7,500 within a few months.

• Houses sometimes need things done that a "First Time Home Buyer" might not have the money to do. Once again within a few months they will have up to $7,500 available to do some of those things.

I see this new Tax Credit as one of the few positives that have come out of the new Housing Bill, and one that I will be talking about with the Buyers, and Realtors that I work with here in Middlesex County. The other major positive that I feel the new Housing Bill has done, is the elimination of the DPA's such as Nehemiah and AmeriDream. But that is a topic for another day. By the way this does not eliminate the DPA programs such as the one provided by CHFA here in Connecticut.

I hope that this helps to shed some light on this new provision to those who have taken the time to read this blog. Please feel free to contact me if you have any questions on this program that I have not addressed, or if you should need clarification on anything I stated.