The newly approved tax credit for first-time buyers is like having a 15 year, interest-free loan.
The down payment and closing costs may actually be less than the credit the buyer receives.
The Housing and Economic Recovery Act of 2008 includes a tax credit for qualified purchases between April 8, 2008 and June 30, 2009. The credit is 10% of the purchase price not to exceed $7,500.
To be eligible for the credit, the taxpayer's adjusted gross income cannot exceed $75,000 if they file their tax as a single person or $150,000 if they are married filing jointly. Adjusted gross income is total annual income reduced by things like qualified retirement contributions, alimony, moving expenses, and a few others.
The taxpayer and spouse, if married, must not have had an ownership interest in a principal residence during the three years prior to the purchase of the home in which the credit is being claimed.
The tax credit is repayable over a 15 year period at zero interest. Each year 6.7% of the tax credit is repaid until it is repaid or the home is sold whichever comes first. The first payment isn't due until two years after the home is purchased. If the home is sold prior to repaying the tax credit, the balance of the unpaid credit is due in that tax year.
A buyer purchasing a $200,000 home with a FHA mortgage would require a 3.5% down payment or $7,000. The buyer would also be responsible for their closing costs. The $7,500 tax credit effective at filing that year's income tax return would recover the $7,000 down payment plus $500 of the closing costs paid by the buyer. Obviously, they have to have the money for the down payment at the time of closing and won't get the tax credit until they file their tax return the next year.
|
Tax Credit Example |
|
Adjusted Gross Income |
<$150,000 |
|
Purchase Price |
$200,000 |
|
Tax Credit – 10% of Purchase Price |
$20,000 |
|
Maximum Tax Credit |
$7,500 |
|
Annual Repayment |
$500 |
This is a wonderful tool to provide an incentive to first-time buyers to purchase prior to July 1, 2009. It may be exactly what some people need to get off the fence. In addition to the tax credit, they can take advantage of lower housing prices, large selection of properties, and low interest rates on fixed rate mortgages.
The combination of these things makes it a great time for buyers to make a decision. Even though the tax credit will be in effect until July 1, 2009, prices of homes and interest rates don't remain static. This could be the opportunity of a lifetime when you look back and say “I absolutely bought at the right time and it was one of the best things we could have done for our family."
Download the First-time Buyer Tax Credit summary.
If you feel that today's competitive market requires that you take some classes to get up-to-date with tax and financing issues, consider taking the CRS 205 class – there will be one in Gulf Shores, AL on October 9-10, 2009. Click here for more information.