One of the most exciting new provisions of the Housing and Economic Recovery Act of 2008 is the First-Time Homebuyer Tax Credit. This credit is designed to encourage first-time homebuyers to go ahead and make the leap to purchase their first homes. Combine this tax credit with the fact that home prices are at historical lows and indeed it is an ideal time for many first-time homebuyers to purchase homes.
SOME POINTS TO KEEP IN MIND...
1. The credit is available for homes purchased between April 9, 2008 and July 1, 2009
2. The credit amounts 10% of the price of the home not to exceed $7,500
3. A first time home buyer is defined as someone who hasn't owned a home for the past three years
4. Single tax payers with incomes of up to $75,000 and married couples with income of up to $150,000 qualify for the full tax credit
5. The tax credit works like an interest free loan and must be repaid over at 15 year period
HOW DOES A TAX CREDIT WORK?
A tax credit is a special provision that reduces income tax liability on a dollar for dollar basis. When filing a tax return, you must include income items, deductions items and the number of exemptions, among other things, to figure your total tax liability. If your total tax liability ends up being $7,500, and you qualify for the full $7,500, this credit would be applied and would wipe out all the taxes due. If your employer had already deducted from your pay checks throughout the year, you would receive a tax refund of $7,500.
DOES THE CREDIT NEED TO BE REPAID?
Yes, the credit does have to be repaid, so it is really more like an interest free loan:
1. If a homebuyer claims the $7,500 credit in 2009 on their federal tax return for a closing that occurred in 2008, then the credit is received in 2009, so repayment begins in 2010 with an annual repayment amount of approx. $500/year.
2. If the homeowner dies, their heirs do not have to pay back the remaining balance.
3. If the house is sold before 15 years have passed and the home's appreciation is less than the amount needed to be paid back, the loan is forgiven.
If the home is turned into a rental or investment property, the pay back balance is due in the year.
Individuals whose Form 1040 filing status is single (or head of household) are eligible for the tax credit if their income is no more than $75,000. Individuals who file a joint return may have no more than $150,000 in income. Individuals with incomes between $75,001 and $94,999 (single) or $150,001 and $169,999 (joint returns) are eligible for a partial tax credit. Individuals with incomes greater than $95,000 (single) or $170,000 (joint return) are not eligible for this tax credit.
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