The First Time Buyer Tax Credit-Buyer Beware!

The Background

 One benefit of the Housing and Economic Recovery Act passed in July of this year is that qualified homebuyers may receive a one time tax credit of up to $7,500.  With the intent of stimulating the economy and encouraging Buyers to get off the fence, this credit is limited to first time buyers (those that have not owned a home in the past 3 years) and is set at a percentage of the home purchase price, 10%, and not to exceed $7,500.  This credit applies to all residential sales between 4/9/2008 and 7/1/2009.  Buyers can take this credit in 2009 for homes purchased in 2008; 2009 purchases can take the credit in 2010.

 The Problem

  The federal government requires the credit to be paid back on each year's tax return beginning in 2011 in small 6.67% increments over 15 years, or about $500 a year for the full $7,500 credit.  This amounts to an interest free loan from Uncle Sam!  How could you possibly go wrong?

The best strategy would be to take the $7,500 (in the form of a refund or the reduced tax paid amount) and put it a safe investment.  Currently the stock market may not be your best choice-think money market or CD.  The rest of this post now refers to the 98% of buyers not following this advice!

 Human nature being what it is, most Buyers will pocket the credit and spend it on something which is an excellent way to jump start the economy.  Remember that this will have to be repaid each year or until the home is sold.  This is where the problem may begin.  You see, when the home is sold the remaining tax credit still due must be repaid in full, upon closing.  Assuming the Buyer sells after 5 years (a not unrealistic time frame), and having made three years of repayment of the credit, the Buyer will have $6,000 less equity upon sale.  No problem you say, what's $6000?  In a declining or flat market it may be the difference between walking away with a little cash or being upside down if the purchase was done with 97 to 100% financing.  The current national housing market is depressed.  When will the market rebound (which it eventually always does) and begin positive appreciation gains?  That is the $64 question.

On a positive note, the National Association of Realtors® asked Congress to do away with the repayment provision of the tax credit to all buyers, not just first time buyers.  The proposals were part of a four point housing stimulus plan submitted in October by the association.  I would doubt Congress will take any action prior to the new administration taking office in 2009.

Jerry Hart                                                    More Denver Real Estate info