The Home Buyer Tax Credit That Is a Loan

The old saying is if it sounds too good to be true, it probably is. And that applies to tax programs too. Let's face it politicians are professional con people. In an effort to look like they are helping the middle class buy a house, they have put together a misleading piece of legislation.

As part of The Housing and Economic Recovery Act of 2008, the First Time Home Buyer Tax Credit was created. On the surface, the credit looks pretty good. The rules are basic.

1. You have to buy a house between April 9, 2008 and July 1, 2009.
2. The house has to be the first house you have bought. For this bill, you or your spouse can't have owned a home for 3 years prior to this purchase.
3. The house can be new or used and of any structure. Condos qualify.
4. Your income must meet guidelines to qualify for the full credit. Single people must have modified adjusted gross income below $75,000. A married couple filing jointly gets up to $150,000. Your modified adjusted gross income is all of your income for the year less any special deductions. On the forms 1040 and 1040A, start with the last number on the first page. (1040EZ line 4) and add in certain income and deductions to get your MAGI. Please check with your tax professsional for all the details.
5. If your income is above the limits, you might still qualify for a partial credit. But once your income is over $95,000 for singles and $170,000 for married jointly you lose the credit.

Once you qualify, you get a tax credit of 10% of your home's purchase price up to $7500. This is a credit. It does not reduce the amount of income you pay tax on but the tax itself. For example, you qualify for the whole $7500 credit. Your tax return is prepared as usual and a tax liability of $4300 is created. The Home Buyer Credit will wipe that out and leave you with no tax. If this was like most other credits, child care credit or the education credits come to mind, you would lose the remaining credit of $3200 and then get back all of your withholding. Bottom line is that your refund would be $4300 larger. But this is a refundable credit. That means you will also get back the unused portion of the credit. So your refund should be $7500 larger than it would have been without the credit.

Sounds great doesn't it. It makes you want to run right out and buy a home.

BUT! BUT! BUT!

Then you get to repay that credit. After a year of home ownership, you have to start paying back the credit over a 15 year period. If you sell the house before the end of the 15 years, the unpaid balance is due out of the proceeds. So, if you received the $7500 credit in 2008. In 2010, you will pay back $500. It's better to think interest free loan not tax credit.

This is just a overview of the credit so check with your tax professional. Some of the details still have to be worked out but the purpose of this hub was a heads up to taxpayers who are looking at buying a home and taking advantage of the credit. This can still be a good deal but you have to know what you are getting into with this credit.

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