By Jerry Hays, President
Creative Capital Solutions, LLC
Bloomington, IN - Wednesday, July 30, President Bush signed into law H.R. 3221, The Housing and Economic Recovery Act of 2008. Although it is best known for its efforts to prevent foreclosures, it includes some tax related provisions, two of which directly impact consumers.
The first and easiest to describe permits non-itemizing homeowners to deduct their state and local property taxes paid for the tax year 2008 and going forward from the income reported on their Federal tax return. This provision is a Federal deduction from taxable income, not a tax credit. The allowable deduction is the lesser of the amount allowable as a deduction under state and local taxes or $500.00 if filing single or $1,000.00 married filing jointly.
The second and more significant tax related provision of the new law provides a direct tax credit to first-time homebuyers. If you have not owned a home in the past three years, you may qualify for a direct tax credit of up to $7,500.00. The credit is available for a limited time. The purchase of your home must take place between April 9, 2008 and July 1, 2009, so if you purchased a home on or after April 9, you may be eligible for the credit. Here is a summary of the plan:
- The amount of the credit is 10% of the purchase price of the home not to exceed $7,500.00. The credit is refundable which means if the taxpayer's tax liability is less than the credit, the government will send the taxpayer a check for the difference up to the full amount of the credit,
- Both new and existing single family homes qualify but the home must be the buyer's principal residence,
- To be eligible for the full credit, the homebuyer's modified adjusted gross income reported on their Federal tax return must be $75,000.00 or less if single and $150,000.00 if married filing jointly. Partial credits are available for homeowners with income up to $95,000.00 and $170,000.00, respectively,
- Although this is being touted as a tax credit, which it is, it is really a 15-year interest free loan from the government. Here is what I mean. Although you get to keep the amount you would normally pay the government in taxes (up to the limits) for the tax year in which you purchase the property, you must pay back the credit over the next 15 years or upon the sale of the house, whichever comes first. For example, a homebuyer claiming a $7,500.00 credit would repay the credit at $500.00 per year beginning two years after the credit is claimed. Although at first glance this may seem like a bummer, it is really still a terrific benefit. Because there is no interest charged, the new homeowner saves up to $4,200.00 in interest payments over a similar 15-year loan with interest being charged at 7%. If the taxpayer is eligible for the full credit, the government is essentially giving them an interest-free loan for a 10% down payment.
- Finally, if you purchase a home in 2009, you may elect to use the credit for the 2008 or 2009 tax year giving you flexibility to take maximum advantage of the credit.
Jerry Hays is a Certified Residential Mortgage Professional, a graduate of the Graduate School of Banking and Past-President of Indiana Mortgage Bankers Association. Jerry holds Indiana real estate broker, insurance and loan broker licenses. For more information, contact Jerry at 330-2122, toll-free at 877-330-2122 or at jerryhays@ccs-indiana.com
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