First-Time Homebuyer Tax Credit

[Jan 23, 2009.]

 

The Housing and Economic Stimulous Act of 2008 includes a $7500 tax credit for first-time homebuyers.  There are a few things to watch out for before deciding if this tax credit is right for your tax strategy. 

Five things to keep in mind

• The home must be purchased between April 9, 2008 and July 1, 2009


• The credit can be 10% of the home's purchase price up to a maximum credit of $7,500


• The homebuyer may not have owned another home in the last three years to qualify as a first-time homebuyer


• A single person cannot make more than $75,000 per year in income and a couple's income cannot exceed $150,000


• This is not free money.  It is an interest free loan for up to fifteen years.  It must be repaid.

What is a tax credit?

A tax credit is used to reduce the tax owed dollar for dollar.  The amount of tax owed is calculated after all the appropriate deductions, exemptions and allowances are taken.  If the tax owed is only $5,000, then the maximum tax credit available would be $5,000 and that would be the amount to be repaid.  If the tax owed was $10,000, then the maximum tax credit would be the full $7,500 reducing the tax owed to $2,500.  If adequate tax was paid to the IRS throughout the year, then a refund would be due. 

The tax credit must be repaid

The repayment must begin no later than two years after the tax credit is taken.  If the tax credit is taken on the 2008 tax return, then the repayment would need to begin on or before the 2010 tax return.  The repayment is made $500 per year until the full tax credit taken is repaid.  If the house is sold, the entire balance of the tax credit is due on sale.  If the capital gains are enough to cover the balance due, it will be taken to pay in full.  If the capital gains are not enough to cover the balance of the tax credit due, then balance will be forgiven!  So there is no risk on owing money if the house looses value before the sale.

For more information on how to take advantage of this tax credit for first-time homebuyers, please consult a tax professional.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.