As part of the Housing and Economic Recovery Act of 2008, home buyers who purchase a primary residence between April 9, 2008 and July 1, 2009 may be eligible for a tax credit of up to $7,500. There's been a lot of talk (and certainly an equal amount of misinformation) about the details of this program, so i'm going to try to answer as many of the questions as possible.
WHAT EXACTLY IS THE $7,500 TAX CREDIT?
It's basically a TAX FREE LOAN from the government equal to 10% of the purchase price of a qualifying home by a qualified individual up to a maximum of $7,500. The $7,500 does have to be paid back over time in nearly every situation, except for a few circumstances which are explained below.
WHO QUALIFIES FOR THE $7,500 TAX CREDIT?
To qualify, a person must:
- Be a first time home buyer (meaning they haven't had ownership interest in a PRIMARY RESIDENCE in the last three years). Married homebuyers with spouses that have owned a home in the last three years do not qualify unfortunately.
- Purchase a primary residence. This can be a single family home, townhome, condo, mobile home or even a houseboat, as long as it's considered a primary residence.
- The closing must take place between April 9, 2008 and July 1, 2009.
- File their taxes.
- Have a modified adjusted gross income of less than $75,000 if single to receive the full credit. Married couples must have a modified adjusted gross income of less than $150,000 to receive the full credit. The tax credit is proportionally "phased out" for those making up to $20,000 per year more. Read below for more details.
IS THIS JUST AN INCOME DEDUCTION OF $7,500 OR IS IT A FULL TAX CREDIT?
It's a full tax credit that reduces the amount of taxes due dollar for dollar. For example, a qualifying homebuyer who would normally get a refund of $2,000 would instead get a refund of $9,500. And likewise, a qualifying homebuyer who would normally pay $9,000 in taxes will only have to pay $1,500. It's a direct credit towards the amount of taxes owed. There's no specific guarantee that a person will get a check for $7,500. It all depends on their total tax liability. Some people will get a huge refund and others may still owe money. But the vast majority of wage earners who have taxes withheld properly from their paychecks and who normally receive a tax refund each year will get back an extra $7,500.
HOW DO HOME BUYERS GO ABOUT RECEIVING THIS TAX CREDIT?
The tax credit will automatically be credited towards their income taxes. Tax preparation software will automatically calculate the tax credit based on the date of the home purchase and the other qualifications. Taxpayers who use a tax preparer should notify them that they purchased a home within the qualifying time period and have the preparer calculate the credit. There are no special forms to fill out, nor is there an application process.
DOES THE $7,500 HAVE TO BE PAID BACK?
In most circumstances, YES. This is where it gets a little tricky, so read this part carefully.
WHEN DOES THE TAX CREDIT HAVE TO BE REPAID?
Homebuyers will have to begin repaying the tax credit TWO YEARS after receiving it. For example, if they received the tax credit on their 2008 tax return, they will begin repaying it when they file their 2010 tax return (due April 15th, 2011).
Homebuyers who received the tax credit must begin repaying the loan TWO YEARS after receiving it. The tax credit is repayed at $500 per year for 15 years IF the homebuyer keeps the home for the entire 15 years.
IF THE HOME IS SOLD WITHIN THE 15 YEARS: The remainder of the loan must be repaid in the following tax year. HOWEVER, if the proceeds of the sale do not cover the balance, the LOAN IS FORGIVEN and DOES NOT HAVE TO BE REPAID.
Here are some examples:
Bob buys a home in 2008 for $100,000 and receives the full $7,500 tax credit on his 2008 tax return. He begins repaying the loan in 2010. In 2015, he has repaid $2,500 of the $7,500, leaving a balance of $5,000. He also sells his home this same year and receives a check back at closing for $3,000 after all expenses are paid (realtor commission, title fees, closing costs, etc). Bob would only have to repay that $3,000 to the government when he files his 2015 tax return. The remaining $2,000 would be FORGIVEN and WOULD NOT HAVE TO BE REPAID.
But if Bob were to sell his home for a higher price and receive $15,000 back at closing, he would have to pay the full $5,000. And likewise, if Bob sold his home for a loss, the entire balance of the loan would be forgiven. He WOUD NOT get a refund of the $2,500 that he has already paid, but would not have to pay back any more money.
HOW DO MARRIED COUPLES CLAIM THE TAX CREDIT?
Married couples filing jointly will get a combined $7,500 tax credit. Married couples filing seperately will each get a $3,750 tax credit.
CAN A BUYER USE THE $7,500 TAX CREDIT TOWARDS THEIR DOWN PAYMENT?
No. Since the homebuyer must wait to receive the tax credit once they file their taxes, there is no way to use it for down payment. Furthermore, the government will not allow the credit to be used until AFTER the closing date. There is no way to qualify before closing. However, FHA does allow a buyer to obtain a loan for the 3.5% down payment from a family member. So it's possible for a homebuyer to borrow the money for down payment from a family member and then repay the loan once they receive the tax credit. The loan can be secured with a lien against the property.
CAN A BUYER SHOW THE $7,500 TAX CREDIT IN THEIR ASSETS TO USE AS RESERVES?
No. Since there's no way to determine exactly how much of a tax rebate the buyer will receive until after their tax return is prepared, this money cannot be used as reserves or counted as assets.
**UPDATE**
I'VE HEARD THAT CONGRESS IS GOING TO INCREASE THE AMOUNT OF THE TAX CREDIT FROM $7,500 TO $15,000. IS THIS TRUE?
Unfortunately it was announced today that this part of the stimulus plan has been scrapped in favor of increasing the amount of the tax credit by $500 to a total of $8,000 instead of the proposed $15,000. Congress estiamted the cost of the $15,000 tax credit would have amounted to $35.5 Billion, whereas increasing it by $500 to a total of $8,000 would only cost $3.7 Billion. Some compromises had to be made. This is a PERFECT EXAMPLE of how the results of the legislative process don't always coincide with rumors in the media. Although the Senate did approve a version of the Stimulus Plan that included an increase to $15,000, the committee struck down this provision before it even had a chance to go though a final vote in both houses of Congress.
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