$7500 First Time Homebuyer Tax Credit - Is It A True Credit?

Is the $7500 first time homebuyers tax credit that we have been hearing about truly a tax credit similar to the child tax credit? The answer is NO! In truth, this tax credit is really an interest free loan from the federal government to be repaid over 15 years.

This is how it works:

1. A first time homebuyer that purchases a home after 4/9/2008 files for the $7500 tax credit on his/her 2008 federal taxes and receives a nice return. For example, if you owe $5000 in federal income taxes you would pay nothing to the IRS and receive a $2500 tax return from the government. If you are due $1000 tax return, you would get an $8500 tax return with this tax credit.
2. Here's the kicker. When this first time homebuyer files his/her 2010 taxes if they claimed the credit on their 2008 taxes, they would have to pay $500 back to the government on top of what they already owe on their income taxes or to be deducted from what they would be getting as a tax return. The reason why I state 2010 is because the buyer doesn't have to start repaying the credit until two years after the tax year in which the credit was claimed. For example, if you owe $5000 in federal income taxes you would be required to pay $5500 to the IRS. If you are due a $1000 tax return, you would get a $500 tax return instead. This would continue each year for up to 15 years until the $7500 is repaid.
3. If the first time homebuyer sells the home, the remaining "credit" would be due from the profit of the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.

Not all people will qualify for this tax "credit" or for the entire $7500.

Who qualifies:

1. A first time homebuyer is defined by law as someone who has not owned a home or has not owned a home in the past three years.
2. First time homebuyers that purchase their home between April 9, 2008 and July 1, 2009.
3. Single or head of household buyers can claim the full $7500 if their adjusted gross income (AGI) is less than $75,000.
4. Married couples filing jointly can claim the full $7500 if their combined AGI is less than $150,000.
5. Single or head of household buyers who earn between $75,000 to $95,000 AGI are eligible for a partial "credit".
6. Married couples filing jointly who earn between $150,000 to $170,000 AGI are eligible for a partial "credit".
7. The "credit" is NOT available for single buyers earning greater than $95,000 AGI and married couples with an AGI that exceeds $170,000.

So, should you file for this "credit"? If you are in good credit standing and in no need of some immediate cash, I wouldn't. This will hang over your head each year until the "credit" is paid off and if you decide to sell before the "credit" is repaid, you would be responsible for paying the remainder of the "credit" in full from the profit of the home. Thus, no additional money to put on the downpayment of your new home. Now that you have the knowledge, the choice is yours.

For more information on this first time homebuyer "credit", contact your accountant and/or visit http://www.federalhousingtaxcredit.gov/ .