First-Time Home Buyer Tax Credit Not a Free Ride

There appears to be a fair amount of confusion over the new First-Time Home Buyer Tax Credit that was included in the recently passed Housing and Economic Act of 2008. Quite frankly, it is not surprising. While driving over this past holiday weekend, we heard at least four different radio ads by various companies and all of them made it seem like this program was a free ride. The reality is something else altogether.

Here’s how the program actually works:

• To be eligible, home buyers must not have owned a home for the last three years. The ownership test applies to both partners in a marriage.
• The tax credit (refund) will be equal to 10% of the purchase price of the property up to a maximum of $7,500.
• The tax credit (refund) is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.
• The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009.
• This program is actually a no interest loan, which home buyers must repay beginning in the second year after they purchase the home. Home buyers who qualified for the whole credit would pay back $500 per year for 15 years. If the home owner sells the home, the remaining credit amount is due from the profit on the home sale. If there is insufficient profit on the sale, the remaining credit payback will be forgiven.
• Single taxpayers with adjusted gross income up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. Individuals and couples with incomes above those amounts may still qualify for a partial credit, however, taxpayers with adjusted gross income above $95,000 for singles and $170,000 for married couples phase out of the program completely.
• There is no need to fill out an application to qualify for the tax credit. First-time homebuyers merely claim the credit when filing the tax return for that year. No pre-approval is necessary.
• The credit is available even to those individuals with little or no federal income tax liability. The federal government will send a refund check for part or all of the credit amount due. Otherwise, the credit is used to offset any unpaid taxes or increase a taxpayers refund.

The bottom line is you need to understand what you're getting and you should seek advice from a financial advisor and/or tax accountant before you proceed. You definitely don't want to listen to a misleading advertisement and think you're getting something for free.