First-Time Home Buyer Tax Credit

Recently I visited my condo building for the grand opening weekend. I was not allowed to see my unit as the unit itself was not complete, but more importantly the third floor was not completed. The grand opening was the first time I was allowed to see the inside of my condo building, instead of just driving by and observing from the outside. The builder had six completed units, two of which were fully furnished models. I find it sort of humorous that 13 units have been sold and they chose to finish 6 units for models, but I do understand they have a business to run. Also, in the long run it is better for me if the entire building is sold and occupied. While at the grand opening I picked up a flier from the National Association of Realtors about the first-time home buyer tax credit.

First-Time Home Buyer Tax Credit

Good old G. W. signed a new housing bill into law on July 30, 2008. As a part of this bill, a temporary tax credit will be offered to first-time home buyers, which I will be when I purchase my condo. A credit valued at 10% of the cost of the home, not to exceed $7,500, is available with the purchase of a principal residence between the dates of April 9, 2008 and July 1, 2009. My closing date is October 3, 2008, which puts me right in the middle of this range.

Eligibility

The credit applies to any single-family residence that will be used as a principal residence, which includes condos (WOOT!). This credit only applies to first-time homeowners. To qualify as a first-time homeowner the purchaser and purchaser’s spouse may not have owned a principal residence within 3 years of the date of the purchase.

What is a Tax Credit

Since this is a tax credit, it might be a good idea to explain what a tax credit is. Tax credits reduce income tax liability on a dollar for dollar basis, which is different than a tax deduction. A tax deduction reduces the taxable income so the value of the deduction is dependent on your tax bracket. For example, if you qualify for the full $7,500 tax credit and you owe $5,000 in taxes at the end of the year, the government will send you a check for $2,500. The government will send this $2,500 refund check because this credit is considered “refundable”.

Income Restrictions

There are income restrictions for the tax credit. Single filers are eligible for the full tax credit if their income is $75,000 or less. Joint filers are eligible for the full tax credit if their income is $150,000 or less. There are phase out rules with regards to exceeding the income restrictions. The tax credit for a single filer will begin to phase out above $75,000 and will completely phase out at $95,000. The tax credit for a joint filer will begin to phase out at $150,000 and will completely phase out at $170,000.

Principal Residence

The purchase must be used as a principal residence in order to receive the tax credit. A principal residence is defined as the home of an individual for more than 50% of his time. The credit applies to principal residences for single-family detached housing, condos or townhouses.

Temporary Tax Credit and Repayment

The tax credit is called temporary, because it must be paid back. Repayment will be done over a span of 15 years starting two years after the tax credit is claimed. Interest will not be charged on the amount of the tax credit, effectively making this tax credit more of an interest free loan. I will claim the tax credit in my 2008 income tax return and will begin paying 6.67% of the amount of the tax credit on my 2010 income tax return.

Selling the Home

I have a temporary plan of living in my condo for about 5 years. This is well short of the 17 year repayment plan outlined in the bill (15 years of repayments and 2 years of no payments). If there is an outstanding amount from the tax credit when the home is sold, the amount that has not been repaid will be due in the income tax return from the year of the sale. If the capital gains from the sale do not cover the amount remaining from the tax credit, a portion of the liability is forgiven. For example, if you still owe $5,000 of the tax credit and sell your home for a gain of $3,000, the remaining $2,000 is forgiven.

Applying for the Credit

The tax credit is simply claimed on the tax return of either 2008 or 2009. Even if your purchase will be in 2009, you may claim the tax credit in 2008, which would make the credit available for the down payment.

Personal Thoughts

I have heard numerous people claiming this tax credit will allow people to purchase a home who otherwise couldn’t afford a home, which is exactly how the subprime mortgage mess started. For most people this credit can not be used as part of a down payment, which does not allow people to qualify for homes they can’t afford.

I haven’t decided how I will use the tax credit. To save for my 20% down payment I have skipped retirement savings so far for 2008. I still plan on fully maximizing my Roth IRA and solo 401k. This tax credit could go a long way towards helping me catch up on my retirement contributions for 2008. If I decide that I can fund my retirement accounts without the help of this tax credit, I might use the money as a one time payment towards principal to advance quickly through my amortization schedule. Finally, the money can go a long ways towards furnishing my condo appropriately. I am grateful for this money even if it is only a 0% interest loan. I will never find an interest free deal and turn it away!