Demystifying the $8000 Tax Credit

Demystifying the $8000 Tax Credit

President Obama’s $8000 tax credit for first-time home buyers is an unprecedented and much-appreciated gift. Never before has the U.S. government helped make it so easy to buy your first home! When you hear tax credit, you may think tax refund, or you may not have any idea what a tax credit is or how it could possibly benefit you. Tax credits are different than tax refunds, although the two can go hand-in-hand. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS. Buying a new home in 2009 could eliminate or significantly reduce your 2009 income taxes. First-time buyers can claim a credit worth $8,000 - or 10% of the home's value, whichever is less - on their 2008 or 2009 taxes. A "first-time home buyer" is legally defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law uses the homeownership history of both the home buyer and his/her spouse. To qualify for the $8000 tax credit, a home purchase must occur on or after January 1, 2009 and before November 30, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill - the amount of withholding they paid during the year plus anything extra they had to pay when they filed their returns - was less than that amount. If you don’t want to use the $8000 credit against your taxes, why not use it towards your down payment or closing costs? The $8000 tax credit can be used as a down payment; however you have to pay the initial 3.5% down payment on your own. In other words, the $8000 tax credit cannot be used for the first 3.5% of the down payment, but it could be used for a down payment over and above the 3.5% you have already put down. If you don’t want to use the $8000 credit towards your down payment, what about using it towards closing costs? The credit can be used for closing costs that are normally associated with buying a home. Title fees, lender fees and inspection fees are all normal closing costs that the $8000 tax credit would cover. Even constructing a home on a lot that you already own qualifies for the tax credit because a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. Lowering or eliminating your income taxes, paying the down payment or closing costs on your home or finally putting an empty lot to use – the choices that the $8000 tax credit gives you are exciting. Marilyn the Realtor would be happy to help you figure out how best to utilize your $8000 tax credit after finding you the home of your dreams (at prices that won’t give you nightmares).