First Time Homebuyers Get a Tax Credit

First-time home buyers – did you know the government recently enacted a benefit to help you make your first home purchase? The incentive gives first time home buyers a federal income tax credit up to $7,500 for those who close on or after April 9, 2008 and before July 1, 2009. 

First-time Home Buyer Tax Credit in a Nutshell

Part of the “Housing and Economic Recovery Act of 2008″ passed last month, creates a temporary, federal tax credit to provide incentive for first-time home buyers to purchase a home.  By including the credit, Congress hopes first-time home buyers will stimulate home sales, reduce the current backlog of home inventory and help to stabilize falling home prices.  As Rob Dietz, economist for the National Association of Home Builders (NAHB) points out, the effects of the credit may extend far beyond the first-time home buyer; as first-time home buyers purchase homes, many home sellers will be able to move up and invest their sales profits into new homes as well.

Since the money must eventually be paid back, the tax credit essentially acts as a no-interest loan that reduces your tax liability for the year it is claimed.  For instance, home buyers who close on a new home purchase in 2008 (after April 9) can claim the credit on their 2008 tax return.   If their tax liability for the year is $5,000, applying the $7,500 tax credit would cover their tax bill and provide a $2,500 refund.  Any taxpayers already due a refund would still receive the full amount, plus the $7,500 tax credit for buying a home.

First-time home buyers who claim the tax credit are expected to begin repayment starting in the second tax year after they close on their home and continue the pro-rata payback on their federal taxes for a 15-year period.  For home buyers who claim the full $7,500 credit, the payments would amount to $500 a year.

If the buyer sells the home before the 15-year period, the remaining credit would be due from whatever profit was made on the sale.  In cases where profits from the sale were less than what was owed for the credit repayment, the remainder would be forgiven.

Paying closing costs, taxes, insurance and all the other expenses required to move into a new home can leave the first time home buyer strapped for cash.  A zero-interest loan can help with renovations, improvements, furnishings - or replenishing your savings for any future expenses.  To have access to a no-interest loan, especially now when credit is tight, is a great benefit.

Consider this illustration given by the NAHB: at 7% interest, a $7,500 loan would cost the borrower about $4,200 in interest over a 15-year period.  To finance the $7,500 through your 30-year mortgage at a 7% interest rate, a homeowner would pay $8,100 in interest over the life of the loan.  If you have already closed on a new home since April 9, 2008, the tax credit is retroactive back to that date, so you may be eligible to take the tax credit this year.

Here are some quick facts to determine if you qualify for the first-time homebuyers tax credit:

First Time Home Buyers – to be eligible, an individual must not have owned a primary home for the past three years, but may have owned a home prior to that.

Taypayers - U.S. citizens and resident aliens who file income taxes qualify for the tax credit.  Non-resident aliens are not eligible.

Income Range – to qualify for a full tax credit of $7,500 (or 10% of the cost of the home), someone filing their taxes as single or head of household can earn no more than $75,000.  Couples who file a joint return must earn $150,000 or less.

Individuals whose incomes fall between $75,001 and $94,999, or married couples who file jointly with incomes from $150,001 and $169,999, are still eligible for partial credit.

Taypayers earning more than $95,000 (single) or $170,000 (joint) are not eligible for this credit.

What do you have to do to claim the tax credit? If you meet the criteria, all you have to do is request the credit on either your 2008 or 2009 federal tax return that will be amended for that purpose.  Home buyers who close in 2008 can take the credit on their 2008 return.  First-time homebuyers who purchase a new home in 2009 before the July 1 cut-off can choose to file an amended 2008 return or request the credit on their 2009 tax return.

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