Last night, a reader named Heather asked the following question:
We are debating about whether or not to take the $7500 from the government for being first time home owners. In 2 years, we will have to start paying â€œthemâ€ back $500 for the next 15 years. If we were to sell our house in that time and not make a profit, the debt would be forgiven. Iâ€™m not sure I want to owe anyone anything, but hubby thinks of it as an interest free loan… Whatâ€™s your take on this?
Oddly enough, I was in the process of writing about the first time homebuyer credit when her question rolled in. Weird. Anyway…
The First Time Homebuyer Tax Credit
When it was first proposed in the “Housing Rescue Bill, ” the first time homebuyer tax credit was, as Heather noted, little more than an interest free loan (more on this below).
According to IRS guidance, the credit:
- Applies to homes purchased after April 8, 2008 and before July 1, 2009
- Reduced a taxpayer’s tax bill or increases their refund dollar-for-dollar
- Is fully refundable, meaning that you can get it even if you owe not taxes
The amount of the credit is 10% of the purchase price of the home in question, up to a maximum of $7, 500 for single taxpayers, or married couples filing jointly. There are, however, a couple of catches…
For starters, the credit is phased out based on your modified adjusted gross income (MAGI). For married couples filing jointly, the credit phases out between $150k-$170k. For all others, the phase out range is $75k-$95k.
The other problem is that it’s not really a credit. Rather, this “credit” has to be paid back in equal installments over the next 15 years along with your taxes. Not such a great credit anymore, huh?
That’s the bad news. The good news is that changes may be afoot…
Conversion to a True Credit?
House Democrats recently outlined their $835 billion economic stimulus package, and one of the things that they’re hoping to do is make the homebuyer tax credit a true credit — with no repayment necessary. Of course, this is still subject to negotiations between the House and Senate, and to passage of the economic stimulus package itself, but…
If it happens, buyers who qualified for the credit in 2008, or those who do so in 2009, will be relieved of the repayment requirement. Is this enough to make you go out and buy a house? Probably not. But if you’re buying one anyway, be sure to take advantage.
Update: The Senate just passed an amendment to the stimulus bill that would create a $15, 000 tax credit with no repayment requirement. Moreover, it would be available to all purchasers, not just first-time homebuyers.