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First-time homebuyer tax credit

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Friday, 12 September 2008

A bill signed into law July 30 will allow first-time homebuyers meeting specific criteria to utilize a $7,500 tax credit on the purchase of a primary residence. In order to qualify for the tax credit, the home must have been purchased on or after April 9, 2008, and before July 1, 2009. Anyone interested in claiming this credit is highly encouraged to consult a tax adviser regarding housing bill H.R. 3221.

This bill includes stipulations for amount of credit, eligible property criteria, income limits and a recapture clause concerning this tax credit. This act stipulates a temporary tax credit can be issued for up to 10 percent of the cost of a home but not to exceed $7,500. For example, on a home costing $55,000, the potential maximum credit allowed equals $5,500. Any home costing more than $75,000 has only a maximum credit potential of $7,500 total whether it is $150,000 or $350,000.

This credit cannot be used toward a down payment as there is currently no provision made for that process. Instead, the homebuyer would claim the credit when filing his income tax using Internal Revenue Service form 1040 and any additional forms IRS requests. Additionally, this credit cannot be used in conjunction with any tax-exempt bond programs offered by a state housing agency.

This tax credit is available to first-time homebuyers and previous homeowners who have not owned a primary residence during the past three years. The property must be located in the United States and classified as a single family residence, which includes condos and co-ops.

The eligibility for this tax credit can also be affected by the amount of adjusted gross income earned by the homebuyer. The maximum credit is available to a single buyer with an income of $75,000 or, if married and filing joint tax returns, the maximum is $150,000 for the couple. The credit is still available to an individual with income of up to $95,000 or up to $170,000 for a joint return, but the credit amount is reduced. For example, a couple making $165,000 of adjusted gross income would have their potential credit reduced to $1,875.

Finally, it is important to understand that this tax credit must be paid back. Called the recapture clause, many consumers find the easiest way to understand this tax credit is by thinking of it as an interest-free loan. Any homebuyer who claims this credit on his taxes must repay the credit over the next 15 years at a percentage of 6.67 percent per year with no interest accrual. This equates to approximately $502.50/year x 15 years assuming the $7,500 maximum credit. If the home is sold prior to the 15-year repayment period, the remaining balance would be paid from the proceeds of the home sale. If the proceeds of the sale do not cover the remaining balance, then the outstanding balance may be forgiven. Again, you are encouraged to visit a tax adviser as the rules and logistics of this program are still evolving.

The National Association of Realtors has created a Frequently Asked Questions handout that can help answer other questions. Please visit www.realtor.org and search H.R. 3221 for more information.

Housing and Economic Recovery Act of 2008 — H.R. 3221

Features

Amount of credit — Ten percent of cost of home, not to exceed $7,500
Eligible property — Any single-family residence (including condos, co-ops) that will be used as a principal residence
Refundable — Yes. Reduces income tax liability for the year of purchase; claimed on tax return for that tax year
Income limit — Yes. Full amount of credit available for individuals with adjusted gross income of no more that $75,000 ($150,000 on a joint return;) phases out above those caps ($95,000 and $170,000, respectively).
First-time homebuyer only — Yes. Purchaser (and purchaser’s spouse) may not have owned a principal residence in three years previous to purchase
Recapture — Yes. Portion (6.67% of credit) to be repaid each year for 15 years, then remainder of credit recaptured on sale
Impact of District of Columbia homebuyer credit — D.C. credit not available if purchaser uses this credit
Effective date — Purchases on or after April 9, 2008
Termination — July 1, 2009
Interaction with alternative minimum tax — Can be used against AMT, so credit will not throw Individual into AMT