Buying a home for some first time buyers in 2008 has been a rough ride, but it just got easier. With the signing of the Housing and Economic Recovery Act of 2008, President Bush and Congress ushered in a new incentive to first time home buyers; a tax credit for first time home buyers up to $7,500.
Tax Credit For First Time Home Buyers
A tax credit is a direct dollar for dollar reduction of what a taxpayer owes on their annual tax return. A tax credit can be given at the federal, state or local government levels. The tax credit that the Housing and Economic Recovery Act of 2008 started is given at the federal level on your IRS tax return.
The tax credit for buying a home is only for first time home buyers. To qualify as a first time home buyer, you cannot have owned a home within the past three years. This definition of first time buyer is a very common guideline found in most loan program underwriting guidelines.
When Can I Claim My First Time Buyer Tax Credit?
The new law made the time frame for claiming this tax credit for buying a house effective on all homes bought by first time home buyers between April 9, 2008 and July 1, 2009. You should check with your tax advisor about your eligibility for this credit. In general the eligibility looks like this: single buyers who make less than $75,000 per year in adjusted gross income and married buyers who make less than $150,000 per year in combined adjusted gross income.
The tax credit can be given to you in several ways. The first way can just be an adjustment on your tax bill that you owe the IRS if you end up owing them money. The second way is that if you are expecting a return when you file for the tax credit, the tax credit that you are eligible for will be given to you along with your return.
For example, if you are expecting a $1,000 return and you qualify for the first time home buyer tax credit then your return could be as much as $8,500 for that particular return. Likewise, if you were expecting to have to pay the IRS $1,000 then you be able to deduct the $1,000 from the amount of the $7,500 tax credit that you qualified for. If you qualified for the full tax credit, then you would receive a check from the IRS for $6,500.
What Is The Catch For Getting The Tax Credit?
The catch is that the tax credit does come with some strings attached. The credit is not a pure credit; it is more like an interest free loan that must be repaid over a 15 year period with the payback period starting 2 years after the claim is made. If you make a claim in 2009 then your payback period starts in 2011.
If you sell your home within the 15 year payback period, then you will have to pay back the tax credit in a lump sum with any equity you may have in your home. The way the law is written, if you don’t have any equity when you sell, you won’t have to pay back the tax credit.
Time To Start Buying Homes Again
The reason for this new tax credit is that it will hopefully jump start the U.S. housing market. With the tax credit incentive the idea is that first time home buyers will pick up the pace at buying homes. This will allow current home owners to sell their homes. With having sold their homes, current home owners can then go out and purchase their move up home, or even downsize into a smaller more affordable home.
This first time home buyer tax credit counter balances the fact that the Housing and Economic Recovery Act of 2008 will be eliminating a home buyer from being able to use down payment assistance programs like AmeriDream and Nehemiah to help them get an FHA mortgage to buy a home. After October 1, 2008 you will not be able to use these programs to purchase a home.
