The Housing and Economic Recovery Act of 2008, the most sweeping housing legislation since the Depression era, was passed by the U.S. Senate and House of Representatives at the end of last month and was signed into law by President Bush.
Among the many changes the government has pushed forward recently to increase sales of the increasing inventory of homes on the market and to decrease the number of foreclosures that are taking place is the tax credit for first time home buyers - a tax credit of up to 10 percent of the sales price, up to $7,500. Many of the provisions of the new law go into effect October 1, 2008 but can be used by first-time home buyers who bought, or will buy, their home between April 9th of this year and July 1, 2009.
This is a good thing - however, understand that this is a CREDIT and not a DEDUCTION. A deduction is an item that is subtracted from your annual income before income taxes are calculated. A tax credit is subtracted from the amount of taxes you owe.
“First-time home buyer” is specifically defined in the new law, and includes those who may have owned a home in the past, but not within the last three years. To qualify, be prepared to show your last three years’ worth of income tax returns to prove that you did not pay mortgage interest during that period. There are also income limitations on the tax credit - $75,000 per year if you’re single and $150,000 if filing a joint return to qualify for the full credit, but the credit does phase out beyond those amounts up to $95,000 for singles and $170,000 for joint filers.
By the way, the tax credit isn’t a gift - you have to pay it back. Nevertheless, it provides an initial reprieve, as repayment doesn’t begin until two years after purchase, and is payable over a 15 year period. If you sell the property before the tax credit has been fully repaid, any remaining amounts owed are due to the IRS upon closing.
If you have questions about this or any other real-estate financial investments please speak to an accountant, lawyer or mortgage professional.
This article on CNN discusses both the pros and cons of the new law.
(Additional editorial content by David Reed, Texas-based mortgage banker with more than 20 years experience and author of Mortgages 101 and Mortgage Confidential.)