First-Time Buyers' Tax Credit

Summary of First-Time Homebuyer Tax Credit
By; Marcie Geffner: Thirdage.com
The government's first-time homebuyer tax credit is not really a credit, it's a loan that will need to be repaid. Make sure you read the fine print.

If you're planning to buy a home in the next 10 months, you may be eager to take advantage of the federal government's latest effort to jump-start the nation's moribund housing markets: A tax credit of up to $7,500 for certain homebuyers.

The credit may appear to be an attractive opportunity, but you should be sure you read the fine print before you elect to claim it on your federal tax return.

"The big story is that it is not a credit. It is a loan, and you are going to have to pay it back, so you'd better make sure that you have the money," says John W. Roth, senior tax analyst at CCH Group, a Riverwoods, Ill.-based company that provides tax software, services and information.

"If you claim the credit, you could end up with some tax issues a couple of years down the road because of the tax liability, and if you sell the house, there is a possibility that you could have a bigger tax bill."

With that warning in mind, here's a summary of the rules.

First-time homebuyer tax credit rules

1. The tax credit is not a deduction

2. The tax credit is repayable to the federal government

3. Selling your home before the 15 years are up?

4. The credit also will be written off if you die before it's repaid

5. The tax credit is restricted to 'first-time homebuyers

6. The tax credit may be taken only for the purchase of a principal residence

7. Modified adjusted gross income limits

8. Some may get a partial credit

9. Technically, the credit is equal to 10 percent of the purchase price of the home

10. The home must be purchased on or after April 9, 2008

11. Buying a home in 2009?

12. The credit cannot be used with mortgage-revenue bond financing

1. The tax credit is not a deduction, but rather a true credit in the sense that your federal income tax liability will be reduced dollar-for-dollar up to the amount of the credit you're entitled to take. For example, if you owed federal income tax of $8,000 and you took the maximum credit of $7,500, your tax bill would be cut to $500. The credit is also refundable: If you owed, for instance, $1,500 in income tax and, again, you took the maximum credit, your tax liability would be zeroed out and you'd get a check for $6,000 from the government.

2. The tax credit is repayable to the federal government. The total credit is divided into small bits of 6.67 percent, each of which is due annually for 15 years. That means if you claimed the maximum credit of $7,500, you'd have an additional tax liability of $502.50 each year for 15 years. No interest is charged.

3. If you sell your home before the 15 years are up, the remainder of the credit that you haven't yet repaid will become due. If you sell your home at a loss, the government will write off the balance of the credit that you still owe.

4. The credit also will be written off if you die before it's repaid. Special rules apply to transfers of property between spouses or incident to divorce; or if the home is subject to "involuntary conversion," such as being destroyed by a natural disaster; or is seized by a government authority though the exercise of eminent domain.

5. The tax credit is restricted to "first-time homebuyers," but the definition includes anyone who didn't have an ownership interest in a principal residence during the prior three years. If you're married, you and your spouse must fit that definition. An ownership interest in an investment property or vacation home is not a disqualification. The rules aren't entirely clear as to how the tax credit will be allocated if two unmarried people buy a home together and only one of them meets the definition.

6. The tax credit may be taken only for the purchase of a principal residence, which means a home where you plan to live most of the time. The home may be a detached house, condominium, town house, manufactured (aka mobile) home or houseboat. It must be located in the United States. A home purchased from a "related party" (e.g., a parent or sibling) is not eligible.