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Tax Credit for “First Time” Buyers

By
Real Estate Agent with Associate Broker at Berkshire Hathaway Home Services Georgia Properties 256152

One of the changes in the economic "stimulus" package is the creation of a true tax credit for "First Time" home buyers. The old "credit" effectively was a loan, since it had to be paid back over several years. The revised tax credit for "First Time" home buyers is a little misleading in that a buyer can qualify as a "first time" buyer if he has not owned a home in the last three years (that would include you or your spouse). The credit would be considerably more effective if it applied to all home buyers without all the restrictions, but this is definitely something you should consider taking advantage of if you can qualify. 

The tax credit is calculated by taking ten percent of the home's purchase price up to $8,000. Most homes in Pickens would qualify for the full credit, but if you paid $75,000 for a home, you would qualify for a $7,500 credit. 

A tax credit differs from a deduction. Assume a married couple making $58,600 in taxable income would generate $8,000 in tax liability. Deductions are used to arrive at taxable income, which means if the couple had an $8,000 deduction they would pay tax on $50,600 and consequently lower the amount they owe the IRS by about $1,000. If the same couple had an $8,000 credit, they would reduce the amount they owe to NOTHING. 

One feature I like about this program is that if you qualify for a tax credit, you can ask your employer for a W-4 form to adjust your withholding tax on your paycheck immediately. A credit of $8,000 would mean additional monthly take home pay of $800 for the remainder of 2009. If your withholding tax is not as much as the credit, you qualify for a refund of the difference when you file your 2009 tax return. 

There is an income limit of $75,000 for individuals or $150,000 for couples, but that is calculated on adjusted gross income. That is where deductions can help you. For example, if you bought a home tomorrow and had a 5% loan on a $200,000 mortgage, you would generate about $7,500 in interest deductions for the remainder of 2009. That would allow an individual with a gross income of $82,500 to reduce his taxable income to $75,000 and qualify for the full credit. Keep in mind that interest deductions keep reducing your taxes for the life of the mortgage. 

I am not a CPA. Hopefully these rough examples are close enough to get you thinking, but they are not intended to be tax advice. You should seek the counsel of a tax professional for that. However, if you have general questions about how the program works, feel free to call me and I'll try to get you headed in the right direction.

 Attached is a chart comparing the old tax credit that was phased out to the new one.

 With all the money our buddies in D.C. are printing, inflation is inevitably in our future. Owning real estate is one way to protect yourself when prices start rising, including the cost of rent. Not owning your home is usually not a good investment strategy for most people.

 Ron Barnes can be reached at 678-520-6648. Prudential Georgia Realty is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential FinancialCompany. Equal Housing Opportunity. Statistics are taken from Trendgraphics.

FIRST-TIME HOMEBUYER TAX CREDIT

As Modified in the American Recovery and Reinvestment Act

Major Modifications Italicized

February 2009

FEATURE

CREDIT AS CREATED JULY 2008

APPLIES TO ALL QUALIFIED PURCHASES ON OR AFTER APRIL 9, 2008

REVISED CREDIT -

EFFECTIVE FOR PURCHASES ON OR AFTER JANUARY 1, 2009 AND BEFORE DECEMBER 1, 2009

Amount of Credit

Lesser of 10 percent of cost of home or $7500

Maximum credit amount increased to $8000

Eligible Property

Any single family residence (including condos, co-ops, townhouses) that will be used as a principal residence.

No change

All principal residences eligible.

Refundable

Yes. Reduces (or can eliminate) income tax liability for the year of purchase. Any unused amount of tax credit refunded to purchaser.

No change

Purchasers will continue to receive refund for unused amount when tax return is filed.

Income Limit

Yes. Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return). Phases out above those caps ($95,000 and $170,000).

No change

Same income limits continue to apply.

First-time Homebuyer Only

Yes. Purchaser (and purchaser's spouse) may not have owned a principal residence in 3 years previous to purchase.

No change

Still available for first-time purchasers only. Three-year rule continues to apply.

Revenue Bond Financing

No credit allowed if home financed with state/local bond funding.

Purchasers who utilize revenue bond financing can use credit.

Repayment

Yes. Portion (6.67% of credit or $500) to be repaid each year for 15 years, starting with 2010 tax filing.

No repayment for purchases on or after January 1, 2009 and before December 1, 2009

Recapture

If home sold before 15-year repayment period ends, then outstanding balance of repayment amount recaptured on sale.

If home is sold within three years of purchase, entire amount of credit is recaptured on sale. Applies only to homes purchased in 2009.

Termination

July 1, 2009

(But note program changes for 2009)

December 1, 2009

Effective Date

Purchases on or after April 9, 2008 and before January 1, 2009. Repayment to begin for 2010 tax year.

All revisions are effective as of January 1, 2009

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