First time homebuyer tax break | $7,500 federal tax credit
The 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.
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SELLING YOUR HOME?? Ask me how to structure and promote an incentive offering linked to this credit to help get your home sold.
Tags: Maryland first time home buyers, Virginia first time homebuyers
February 14th, 2009 at 2:31 pm
Looks like the new ‘economic stimulus’ bill will give an $8,000 credit.
Credit is no longer required to be repaid as long home is not sold within three years.
February 12th, 2009 at 6:41 pm
The latest proposed $15,000 tax credit to homebuyers was removed from the upcoming economic stimulus package.
February 6th, 2009 at 4:28 pm
The stimulus bill now under consideration would make that tax credit a true credit that does NOT need to be repaid.
ALSO, it is for first time home buyers who buy before August of this year.
February 4th, 2009 at 6:17 pm
The maximum credit is $7500. $3,750 if married filing seperate..
The credit phases out based on modified adjusted gross income (most cases this is adjusted gross income). If your income is in excess of $95,000 (sinlge or married filing seperate) $170,000 if filing joint you can not claim the credit.
You can not claim if you are eligible for the DC first-time home buyer credit.
The credit does have to be repaid over 15 years (there are a few exceptions). The credit has to be paid in full in the year of sale, unless there is no gain.
IRS form 5405 explains all the details.
February 4th, 2009 at 6:02 pm
[...] sales. stimulate homesales. The National Associations of Realtors and Home Builders have urged increasing the $7,500 tax credit, making it apply to all buyers, not just first-time buyers, and/or doing away with the payback. [...]
February 4th, 2009 at 5:34 pm
Fernando,
Great post this is exactly the information the people need. I want to add my two cents also.
I read last week that part of the stimulus package was that the repayment portion of the tax credit would be waived. The restriction on joint earners over 150k would remain in place.
Has anyone else read or know anything about the repayment part being waived. If it is keep in mind what I read was the House version, it will have to reconciled with a Senate version so who knows exactly what the outcome will be. This is important so if anyone has the latest, let’s hear it.
Thanks,
Brent
December 2nd, 2008 at 4:47 pm
[...] homebuyers have another reason to think about buying a home in 2009, 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 qualify for a full [...]
September 19th, 2008 at 2:00 pm
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