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by Danielle Hale, Research Economist
On July 30 of this year, President Bush signed the Housing and Economic Recovery Act of 2008. One of the provisions of this law creates a new, temporary tax credit as an incentive for first-time home buyers. In his commentary, NAR Chief Economist Lawrence Yun discussed some of the broader impacts of this provision. This article examines more of the details of the first-time home buyer tax credit.
Buy a home and get a tax break! As part of the Housing and Economic Recovery Act of 2008, a first-time home buyer tax credit is now available. That is good news - both for those first-time buyers who have been "on the fence" waiting to purchase a home, as well as for REALTORS® who can help put those buyers into homes.
Who is Eligible?
First-time home buyers who purchase(d) a principal residence on or after April 9, 2008 and before July 1, 2009 are eligible for the credit. A first-time home buyer is defined as an individual who has not had an ownership interest in a principal residence in the three-year period before the date of home
purchase, and someone who has never taken advantage of the first-time home buyer credit available to residents of Washington, D.C. (see below). In the case of married couples, both must be first-time home buyers.
For other groups purchasing a home, the statute is less clear. Take a couple who is planning to be married in 2009. The bride-to-be and her fiancé purchased a home on June 1, 2008. She previously
owned a home in 2006 while her fiancé has never owned one. The bride will not qualify for the tax credit for the 2008 purchase because she owned a home after June 1, 2005 (three years before the date of the couple's purchase). But, since both were single when they purchased the home, the groom may
qualify for the credit. He may be eligible because both of them will file tax returns as Single for 2008. (If they married in 2008, neither would be eligible). When purchasers file a joint tax return, both
must be first-time buyers.
Obviously there are other types of households, and in some of these cases the statute could be somewhat ambiguous. As for any major financial investment, purchasers should consult a tax advisor.
Income Restrictions
There are some income restrictions with this program. Those restrictions are based on the tax filing status the purchaser claims when filing his/her income tax return. The maximum income for individuals filing as "Single" (or "Head of Household") is $95,000; individuals filing a joint return may have income of no more than $170,000.
How Does it Work?
The credit directly reduces the total amount of taxes owed and is refundable. When the buyer files his/her taxes, for the year he or she purchased the home (2008 or 2009), the taxpayer will be able to subtract the amount of the credit from his/her Federal income tax liability, increasing their refund
or reducing the amount owed.
The amount of the credit is based on the price of the home being purchased. The tax credit is equal to 10 percent of the purchase price of the home up to $7,500. The full credit is available for single buyers whose adjusted gross income is less than $75,000. If the buyer's adjusted gross income is greater than
$75,000 and his/her home purchase qualifies the buyers for the full credit, the credit phases out. For married couples filing jointly, the credit begins to phase out at an adjusted gross income of $150,000 (for details, see charts).
The tax credit is not completely free money for buyers to keep. It has a payback provision that makes it similar to an interest free-loan. Two years after the credit is claimed, buyers will have to begin repaying that "loan" so that the credit is paid back in full over the course of 15 years. For first time buyers who qualify for the full credit, the payback amount is $500 per year. Those getting less than the full credit pay equally over the 15 years (which is a rate of 6.67% per year).
If a qualifying home is resold before the credit is repaid, the seller will have to immediately pay the outstanding balance of the credit. If the home is sold at a loss, then nothing more is owed.
Other Eligibility Conditions
A home buyer tax credit has been available for first-time buyers in Washington, D.C. for many years. But buyers cannot claim both the DC and the national first-time home buyer tax credit. In addition, purchases by non-resident aliens and purchases financed by proceeds from a qualified mortgage issue are not eligible. Home purchases between relatives and other gifts of residences are not eligible for the credit. Also, the credit is good only for a principal residence located in the United States. This includes
single-family detached housing, condos or coops, townhouses or any similar type of new or existing dwelling.
Ceteris Paribus
Even with the above exclusionary factors, first-time buyers purchasing a home will reap the other benefits of homeownership. They will be able to deduct their mortgage interest payments on their
taxes, as well as their property taxes. In addition, when they sell that home, those owners will be entitled to the capital gains tax exclusion. And of course, these first-time buyers will at last be able to
feel the pride and security of owning their own home.
For More Information
Buying a first home is a big step. And first-time home buyers have historically accounted for around 40 percent of all home purchases in any given year. But the downturn in the housing market, the credit crisis, a soft job market, and slowing economy have placed many of these first-time buyers "on the fence" -- waiting for the right encouragement to make that important decision to purchase a home. REALTORS® are experienced in dealing with first-time home buyers. Knowing about the first-time home buyer tax credit and how it works can help REALTORS® serve those first-time clients even better.
*NAR has a variety of information available on the First-time Homebuyer Tax Credit. For further details, visit www.realtor.org. A brochure for REALTORS® to share with their clients interested in the provisions of the tax credit will be available in late summer. For more information about the brochure, contact Thomas Doyle at
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Source: REALTOR.org
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