You may have heard about the temporary tax credit available to first-time home buyers as part of the Housing and Economic Recovery Act of 2008.
What you may not have heard is that along with first-time home buyers, the IRS includes anyone who hasn’t owned a home in the previous three years. From the IRS website:
Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.
When you hear “first-time buyer”, don’t you think of someone who has never owned a home? Not so in this case. Good to know.
Before reading on, please understand that I am not a tax guy. I’m not a CPA, tax attorney, or bookkeeper. I am passing on information as I understand it, including the imaginary and fictitious example that follows, but I strongly encourage you to seek further information from a qualified tax professional. Whew.
Tax credit NOT tax deduction
Unlike a tax deduction which reduces your taxable income, a tax credit actually reduces your income tax directly.
For example, let’s say you had an adjusted gross income (AGI) of $35,000 and an overall tax liability of 25% or $8,750. A $1,000 tax deduction would reduce your AGI to $34,000, which would reduce your tax liability to $8,500, saving you an additional $250. On the other hand, a tax credit of $1,000 in the same example would reduce your tax liability to $7,750, saving you the full $1,000. That’s better!
While tons of tax deductions can be found within the convoluted maze that is our tax code, tax credits are few and far between.
Temporary tax credit similar to interest-free loan
The temporary tax credit, which is available to qualified individuals on qualifying purchases made between April 9, 2008 and July 1, 2009, acts very much like an interest-free loan.
The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.
Although The National Association of REALTORS has urged Congress to eliminate the provision that requires the tax credit to be repaid, there has been no change to that provision as of this writing.
Other things you need to know about the tax credit
Like any good piece of tax code, there are some other qualifications and restrictions. Some of the caveats include:
- Income restrictions – Yes, there is a maximum income limit to qualify for the credit, but you might be surprised how high it is. Joint filers can have a modified adjusted gross income of $170,000 and still qualify.
- Primary residence – Not intended for rental or or vacation properties.
- Arms length transactions – The purchase of the property must not be from a close relative.
There are other restrictions that must be met in order to qualify for the tax credit. Be sure to visit the IRS site for more info. You might want to check out The National Assocaiton of Home Builders site, too. And last, but not least, please check with a tax professional first to make sure you will be able to claim the tax credit.
This temporary tax credit creates a fantastic way for soemone to become a homeowner, but I haven’t heard much talk about it. If you know of someone who may be interested in taking advantage of this unique opportunity, please let them know about it. It’s this first time anything like it has been available to my knowledge.
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