First time homebuyer tax credit – what is it and how to get it

Spring Texas Homes #14 for Affordability

August 8, 2008

Spring Texas Schools back in session

August 16, 2008

February 2009 UPDATE– If you were a first time homebuyer and purchased a home in 2008 the tax credit outlined below applies to you. If you are a first time homebuyer and are planning on or have already purchased a home in 2009 read – 2009 First time homebuyer tax credit.

If you are a first time homebuyer looking to purchase in the Spring Texas area, you need to be aware of the latest housing bill and its potential benefits to YOU. The housing bill which was signed into law is the Housing and Economic Recovery Act of 2008.

Amongst other things the Housing and Economic Recovery Act of 2008 was designed to give the housing industry a shot in the arm and an incentive to get buyers off the fence and purchase a home.

WHAT IS THE FIRST-TIME HOMEBUYER TAX CREDIT?:

A $7,500 tax credit for eligible first-time homebuyers who purchase either a resale or new home. An eligible first-time homebuyer is a buyer who has not owned a principle residence during the last three years.
The full tax credit is available for individual taxpayers with a modified adjusted gross income up to $75,000 and for married taxpayers with adjusted gross income up to $150,000. It is completely phased out for individual taxpayers and married taxpayers with a modified adjusted gross income of $95,000 and $170,000 or higher, respectively.

WHAT IS A TAX CREDIT?: A tax credit is a dollar for dollar reduction in what you as a taxpayer owe. For example … let’s say that based upon your income your total tax liability is $10,000. The tax credit reduces the amount of tax that you owe by $7,500 to $2,500.

You might be thinking that your tax liability is never $10,000 because of the deductions that are taken out of each of your paycheck. That’s not exactly true. Your tax liability may be over $10,000 but because you have accurately estimated your withholdings, what you have to pay in on April 15th is NOT $10,000.

For example … if on April 15th you have to pay the United States Treasury $1,000 and you qualify for the first-time homebuyer tax credit, instead of now needing to write out a check you would be receiving a refund. A refund in the amount of $6,500 which is the $1,000 that you owe minus the $7,5000 first-time homebuyer tax credit.

DOES THE TAX CREDIT HAVE TO BE REPAID BACK?: The short answer is YES. The tax credit is NOT FREE MONEY that our government is giving you to purchase a home. Too bad its not because wouldn’t that be a sweet deal. Instead its best described as an interest free loan that has to be paid back over 15 years or when you sell the home.

A first-time homebuyer receiving a $7,500 tax credit is required to repay the credit at $500 per year. You do not have to begin making repayments on the tax credit until two years after the credit is claimed. Thus if you purchase a home in 2008 and claim the credit on your 2008 tax return, the first $500 repayment of the credit is due at the time your 2010 tax return is filed.

HOW TO GET THE FIRST-TIME HOMEBUYER TAX CREDIT:

Be a first-time homebuyer and purchase a resale or new home between April 9, 2008 and December 31, 2008
Take the credit on your federal income tax return by filing form 5405 First time homebuyer tax credit and attaching it to your 1040 form. Form 5405 is relatively easy to complete that is for an IRS form.