First-time home buyers are now eligible for a tax credit of up to $7,500 under the U.S. Housing and Economic Recover Act of 2008.
To qualify for the tax credit, purchasers must close on a home between 09 April 2008 and 01 July 2009. Married couples with incomes up to $150,000 qualify for the full tax credit, as do single taxpayers with incomes below $75,000. (Those with higher incomes may be eligible for a partial tax credit.)
The tax credit is equal to 10% of the home’s purchase price, but is capped at $7500:
- If you purchase a $60,000 home, you qualify for a $6000 tax credit.
- If you purchase a $75,000 home, you qualify for a $7500 tax credit.
- If you purchase a $90,000 home, you qualify for a $7500 tax credit.
There’s one huge caveat to this program: This tax credit isn’t really a tax credit — it’s an interest-free loan from the U.S. government. From the FAQ at National Association of Home Builders mini-site:
Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale.
For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed.
If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
Does it make sense to take this tax credit if you qualify? Shawn wrote yesterday looking for advice: “I recently bought a house and was informed about this ‘tax credit’. It turns out that I am eligible. Do you think it would be a good idea to take advantage of this?”
We’ve been taught to be wary of anything that seems too good to be true. Still, I can’t think of a reason not to do this if you can. You’re basically saying, “Okay, I’ll pay the government an extra $500 in taxes for the next fifteen years in exchange for them giving me $7500 now.”
Would you take this tax credit? If you’re thinking of buying a home, does this program influence your decision?
Note: If you’ve considered buying a home but don’t know where to start, check out the U.S. Department of Housing and Urban Development’s common questions from first-time homebuyers. This document provides excellent information about the homebuying process.
This article is about House and Home, News, Taxes
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In my opinion, this is clearly a handout for new home buyers. The government is taking $7,500 from one group of taxpayers and giving it to another. You can argue whether or not this has societal benefits, but I don’t think you can make a reasonable argument that it isn’t a handout.
If you qualify, I can’t see a financial reason not to take it. You can either pay down your mortgage which will give you a return equal to your mortgage rate, or you can invest it and slowly pay it back while earning interest. I can only see this being a problem if you spend it on things that have no long term value.
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You know, just a thought: if they get away with this, calling a loan a tax credit? They will probably try it again and again. Say goodbye to tax incentives with no strings attached.
I really don’t see the point of the loan. The one benefit I can see from it aside from the lack of interest charged is that, as one commenter pointed out, the loan becomes worth less and less as years pass thanks to the inflation rate.
But there are lots of programs out there to help people buy houses if the problem is a shortage of up-front funds. (Even $60k houses–which, to respond to another commenter, do exist here in the Midwest/Rust Belt and some are even livable!). Some of them even involve grant money. And in a pinch you can try Habitat for Humanity if you qualify. But it might make more sense to keep renting, for now, if you weren’t going to buy anyway.
Don’t forget that purchasing a home requires upkeep because you no longer have a landlord taking care of things for you. I found that out the hard way. Nothing like a dead water heater to set you back a month in your other bills if you aren’t prepared. If you’re going to do this anyway, put the money aside for repairs. You’ll thank yourself later.
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I will most definitely take this credit! I might not qualify for the full $7500 but I’ll take every penny I’m eligible for. It’s essentially an interest-free loan for the next fifteen years. I’d rather have money now and pay back Uncle Sam with cheaper future dollars. Like others on this board my plan is to replenish my emergency fund – you never know what life has in store.
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Reading through the comments (admittedly only the first 10 or so) I’m a bit concerned that this credit is encouraging people who can’t afford to buy a house to leap into the market before they are ready in order to get in before July 2009 and qualify for the credit, rather than waiting until they really can afford to buy. Considering all the current problems caused by sub-prime mortgages you would think people would be more careful!
I’m also amazed that 3.5% is the minimum down payment required- that’s crazy! Although not rmandated, here in Australia you’d be hard pressed to get a loan unless you had at least a 10% deposit saved.
On the upside, our Government has just announced an increase in our First Home Buyers Grant. Previously it was $7000 payment (tax free and never to be paid back- a grant rather than a credit), it has now been doubled to $14,000 for first home buyers and tripled to $21,000 for first home builders in an effort to prevent a slow down in the housing market. Gotta love really free money!
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Even if you don’t need it, you should just take the ‘loan’ from the government since it’s interest free, put it in a high yield savings/CD, and you’ll come out ahead by a pretty decent amount. At least as much as the work of all that is worth.
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I closed on my house on April 18th, barely meeting the time requirements of the credit. This is a no-brainer to me. We will definitely be taking the credit!
We plan on paying down our mortgage $7500 in one swoop to decrease the amount of interest we’ll owe over the life of the loan. Sure, we could take the money and invest it or put it in an interest-bearing account. But unless you put the money in a Roth IRA you’re going to have to pay taxes on the interest, so you have to take that into consideration as well. Our mortgage rate is 6.25%, so making a lump sum payment of $7500 towards principal seems like a good plan to us.
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I have a question, and maybe J.D. or one of our intrepid commenters can look into it.
My wife and I are looking to buy our first home. We have $14,000 saved for a down payment, and don’t want a monthly payment more than what we’re currently putting away a month, $1400, even when including taxes and insurance. Looking at the market around where we live, it looks like even after the $7500 credit, we may be able to accomplish that goal by July 1 2009, or we may not.
So my question is, if I take the $7500 pre-emptively by lowering my withholding and do not buy the house, but am still able to cover my tax liability, will there be a penalty? I would hope not. I would guess, though, that I would wind up paying whatever penalty exists for withholding a good deal more than your tax liability. What does everybody think?
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My wife and I bought our house on April 8th of 2008. Missing the qualifying date by ONE DAY. Does anyone know if they will be making revisions to this tax credit/loan??
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This credit isn’t fair. I bought my first house in 2007. Where is my $7,500 dollar refund. I currently work 2 jobs just to get by. I could use that money. Thanks for nothing.
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Now I understand the program and how it works. But my question is this: If I applied for the credit and currently owe taxes to the Feds, would that credit just transfer over to them without me even having any choice or would I get the check?
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taking the 7500 putting it right into a CD…. bam
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The $7500 is really going to help me out. In 2008 I moved for a new job, bought my first house, and my wife had our first child.
In Alaska there is an energy rebate program. You have an energy inspector rate your home. You have 18 months to improve your rating. Depending on how much your energy rating improved, you can get $4000 to $10,000 from the state (not sure if that is taxable or not, left to assume so).
I will use the $7500 towards home repairs that increase my energy rating. I should get most of the money I put in to repair work back via the state and a higher resell value to boot.
I would rather see lower taxes than hand outs but when money is tight and the government is tossing it around, you can bet I will get all I can.
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The best part to me, which no one has discussed, is that if your house LOSES value (which almost every house has) the debt is forgiven!
So my $106k house could sell for around $100k and I would still break even roughly!
This is awesome! Am I missing something?
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Hey everyone listen up… do NOT put this money into a CD. CDs have HORRIBLE rates right now. Here’s my wife and my’s plans:
We purchased our first home in Aug 2008 with 30% down. We got a 6.75% rate (and have since refinanced down to 5.625%). We will be moving again in no later than 4-5 years.
Because of this, we will be putting $5000 toward our mortgage and putting $2500 into ING savings. The $2500 will be earning relatively low interest but will not be touched other than to pay back this loan every year until we move. The $5000 toward the mortgage will make an absolutely guaranteed 5.75% annualized return over the 5 years.
Show me somewhere else that is a perfectly safe investment with a guaranteed 5.75% return in the market right now? Nowhere! I suggest others do this as well if they plan on selling in the next few years.
NOTE: The reason the 5.75% return is guaranteed is that no matter what, when I sell my home, I WILL have to pay of the principal. By paying it off now, I don’t get charged the interest on $5000 of it over the next 5 years. Thus, the net results is that I am earning 5.75% annually.
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I purchased a house in Sept 2008 and could not believe when the first time homebuyer’s tax credit was changed from a loan that needs to be repaid to one that does not.
Please make your voice heard on the following petition site:
http://www.thepetitionsite.com/1/2008-First-Time-Home-Buyer-Rebate#signatures
Hopefully it will be amended and we can keep our money, too.
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I AM RENTING WITH AN OPTION TO BUY, DO I QUALIFY
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