First time homebuyer tax break | $7,500 federal tax credit
Wednesday, September 17th, 2008The Housing and Economic Recovery Act contains an incentive aimed at encouraging fence-sitting first-time homebuyers to start thinking about a purchase soon, a federal tax credit of up to $7,500. The credit is 10% of the cost of a home, so a house costing $75,000 will be enough to qualify for the full credit. The credit is refundable, which means that the government will pay you the difference if your tax liability is less than your credit amount.
However, you will be required to pay the credit back. The payback is over 15 years, so 6.67% of the credit each year ($500 a year for a full credit) will be added annually to your federal tax bill. If you sell the home before the end of that 15-year period, the remaining balance would come due.
Fortunately, you won’t be required to pay back more than you net from the sale. So if the sale of your home only nets $4,000 and you still owe $5,000, the $1,000 difference will be forgiven. Because there is an income limit, you can earn too much to qualify for the credit. You must have “modified” adjusted gross income (MAGI) of $150,000 or less if you are a couple filing a joint return, $75,000 or less if you’re single to get a full credit.
You can still get a partial credit up to $170,000 MAGI (joint) and $95,000 (single) based on where your income falls within the $20,000 phaseout range. For instance, if you and your spouse have MAGI of $165,000, (75% of the $20,000 phaseout, you would be able to get a 25% ($1,875) credit. If one spouse has substantially greater income than the other, it might be worth exploring filing separate returns, since a credit of $3,750 would be available to a spouse with MAGI of less than $75,000.
Because of the payback requirement, the credit really is more like a 15-year (or less) interest-free loan from the government than an outright gift. So how much is the credit really worth? Assume that, in place of the credit, you took out a 15-year loan for $7,500 at 6.5% (about what 30-year fixed mortgage rates are today). That loan would call for a monthly payment of about $65 per month (a portion of which might be tax deductible), versus the roughly $42 per month required for your credit payback. Not bad, but not quite free money.
What constitutes a “first-time homebuyer?” It is a person who has not owned a principal residence in the three years prior to the date of purchase of the home for which the credit is being claimed. If you are a first-time buyer who bought on or after April 9 of this year, you already qualify for the credit. If you haven’t bought yet, you have until July 1 of 2009 to buy and get the credit. Home builders are excited about the credit after months of declining sales of new homes. They have a web site to promote the credit and answer questions (federalhousingtaxcredit.com). And expect the builders to marry their own incentives to the credit. For instance, Pulte Homes has already announced it will match the credit with a comparable discount for all buyers. Individual home sellers trying to attract buyers, especially first-time homebuyers, might take a similar approach.
© 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Finance®
SELLING YOUR HOME?? Ask me how to structure and promote an incentive offering linked to this credit to help get your home sold.
