We have been getting quite a number of requests for information on the "First Time Homebuyer Credit" that was introduced through legislation this past summer. The following is the view from here.

A bill signed into law on July 30th, 2008 (H.R. 3221) will allow first time homebuyers meeting specific criteria to utilize a $7500 tax credit on the purchase of a primary residence. In order to qualify for the tax credit the home must have been purchased on or after April 9, 2008 and before July 1, 2009. I encourage anyone interested in claiming this credit is to consult your tax advisor.

 

In summary in is my understanding the bill includes stipulations for amount of credit, eligible property criteria, income limits, and a recapture clause in regards to this tax credit. The act specifically stipulates a temporary tax credit could be issued for of up to ten percent of the cost of a home but not to exceed $7500. For example on a home costing $55,000 the potential maximum credit allowed equals $5,500. Any home costing more than $75,000 still has only a maximum credit potential of $7,500 total whether it is $150,000 or $350,000. This credit cannot be used toward down payment as there is currently no provision made for that process. Instead the home buyer would claim the credit when filing their income taxes and use IRS form 1040 and any additional forms requested by the Internal Revenue Service. Additionally, this credit cannot be used in conjunction with any tax-exempt bond programs offered by a state housing agency.

 

This tax credit is available to first-time home buyers and previous home owners that have not owned a primary residence during the past 3 years. The property must be located in the United States and be classified as a single family residence which includes condos and co-ops. The eligibility for this tax credit can also be impacted by the amount of adjusted gross income earned by the home buyer. The maximum credit is available to a single buyer with income of $75,000 or if married and filing joint tax returns the maximum is $150,000 for the couple. The credit is still available to an individual with income of up to $95,000 or up to $170,000 for a joint return but the credit amount is reduced. For example a couple making $165,000 of adjusted gross income would have their potential credit reduced to $1,875.

 

Finally and most importantly to understand about this tax credit is that it must be paid back, called the “recapture clause.” Many consumers find the easiest way to understand this tax credit is by thinking of it as an interest-free loan. Any home buyer that claims this credit on their taxes becomes subject to repay the credit over the next 15 years at a percentage of 6.67% per year with no interest accrual.

This equates to approximately $502.50/year x 15 years assuming the $7,500 maximum credit. If the home is sold prior to the 15 year repayment period the remaining balance would be paid from the proceeds of the home sale. If the proceeds of the sale do not cover the remaining balance then the outstanding balance may be forgiven. Again I encourage you to visit a tax advisor as the rules and logistics of this program are still evolving. Purchasing your first home may seem daunting in today’s world of “mortgage crisis,” high gas prices, and a seemingly unstable economy but help is available.

 

More information can be found at the National Association of REALTORS® website. Visit http://www.REALTOR.org and search H.R. 3221 for more information.