Here are answers to some frequently asked questions (source: National Association of Home Builders) about the first time home buyer tax credit that was part of the Housing and Economic Recovery Act of 2008.
1) Who is eligible to claim the $7,500 tax credit?
First time home buyers purchasing any kind of home. To qualify, a home purchase must occur on or after April 9, 2008 and before July 1, 2009.
2) What is the definition of a first time home buyer?
A buyer who has not owned a principal residence during the 3-year period prior to the home purchase.
3) What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhomes and condominiums.
4) Does the credit amount differ based on filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as “married filing separately” (in essence, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
5) Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
6) What does it mean that the tax credit is refundable?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit. For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
7) What is the difference between a tax credit and a tax deduction?
A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe the IRS nothing. A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15% tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15% of $7,500), or lowered from $7,500 to $6,375.
Does the credit have to be paid back?
Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The homeowner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the homeowner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
9) Why must the money be repaid?
Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.
10) Because the money must be repaid, isn’t the first-time home buyer program really a zero-interest loan rather than a traditional tax credit?
Yes. Because the tax credit must be repaid, it does operate like a zero-interest loan. Assuming an interest rate of 7%, that means the homeowner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed.
Hopefully this blog helps explains some of the nuances of the $7,500 tax credit for first time home buyers. Please consult your tax accountant for specific details about this credit to determine how it would affect you. I’d suggest talking with a qualified lender to find as many loan options that are available to you and then lay them down, side-by-side, and select the loan that best suits your goals.
If you live in the Fort Collins or Northern Colorado area please feel free to contact me to discuss your options and I can refer you to my first time home buyer loan specialist. My direct email is Mike@MikeMalvey.com and you can also visit www.SearchFortCollinsMLS.com.
Are you a first time home buyer in Fort Collins or in the Northern Colorado area? if so, check out www.FortCollinsHomesByEmail.com for information on the ZERO down payment programs available.
Thanks for reading and taking my blog views to over 17,000!!
