The Housing and Economic Recovery Act of 2008 was signed into law by the President on July 30, 2008. It began on October 1, 2008 and sunset on September 30, 2011. It was designed primarily to address the subprime mortgage loan crisis. But, one of the features of this legislation is a tax credit that the government hopes will help stimulate the housing market. This tax credit is only available to first time homebuyers. A first time homebuyer loan is financing for a borrower that is defined as someone who has not owned a primary residence for 3 years prior to the home purchase. FHA home loans have been helping new homebuyers for years, but their recent expansion for 1st time home-buying should reach out to more consumers.
How to Qualify for the Tax Credit
First time home buyers who finance a home between April 9, 2008 and July 1, 2009 are eligible to take a tax credit equal to 10 percent of the purchase price of a principal residence, up to $7,500 on their 2008 tax returns. A qualifying home purchase is a single-family detached home, townhouse, condominium, manufactured home, or even a houseboat. Single taxpayers with modified gross incomes up to $75,000 and married taxpayers with a joint modified gross income of up to $150,000 are eligible for the full amount. Above those incomes, the tax credit begins to phase out.
Getting Started with the Tax Credit
All you have to do is claim the tax credit on your federal income tax return. No additional paperwork is required. If you don’t want to wait until you file your return to claim the credit, you can simply reduce your income tax withholding.
The NAHB reports, “Buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding.”
Important Notes about the Tax Credit
Here are some important things to not about this tax credit, so you know just what to expect if you decide to take it:
- This tax credit is basically an interest-free loan, which must be paid back over the course of 15 years.
- This is a tax credit, and not a tax deduction, meaning that it is a dollar for dollar reduction on taxes owed, as opposed to a tax deduction, which reduces the amount of your adjusted gross income that can be taxed.
- The credit is refundable, meaning if you owe $2,000 in taxes and take the $7,500 credit, you will receive at $5,500 refund.
- The credit must be repaid to the government over 15 years or when the house is sold. For those taking the tax credit in 2008, the first $500 payment would need to be made when the buyer files their 2010 tax return.
What if I sell the house?
If you sell your home within 15 years, and the gain on the home is less than the amount of the credit, then the remaining portion of the tax credit is forgiven. If the gain is greater than the remaining portion of the tax credit, then the balance will be due for that year’s income taxes.
Date list of all the tax programs, credits and deductions can be found on the IRS Web site. Home Loan
Comment by Home Loan — October 5, 2008 @ 9:05 pm