Spring has sprung and home buying has begun. Corny but true. Interest rates are at an all time low--a low we are likely never to see again in our lifetime. And Uncle Sam is offering an incredible incentive for any taxpayer with good credit to become a home owner for the first time.
There seems to be a little confusion about how great of a deal this tax credit really is, understandably as it involves the IRS, two versions and a time constraint that isn't emphasized hardly enough. Congress passed the $7500 tax credit in 2008 as a mechanism to decrease the gross inventory of homes on the market but that credit was more of an interest free loan and did little to boost housing demand.
In February 2009, Congress increased the tax credit to $8000, for first time homebuyers only, for a limited time (ONLY on homes purchased through December 1 2009), and it's what's called "refundable" credit. This is the good part, but first let's hit the basics.
How does the tax credit work? Credits are claimed on an individual's income tax return and every dollar of a tax credit reduces income taxes by a dollar. The qualified purchaser figures all the income items and exemptions and makes all calculations to find the total tax due. Once the total tax due is calculated, tax credits are applied to reduce the total tax bill. For example if the total tax due is calculated to be $9000, an $8000 credit would wipe out all but $1000.
Now back to the "refundable" part of the tax credit. Many taxpayers do not have tax liability that exceeds $8000 so those with less tax liability will in most cases get a refund meaning they receive full value of the credit. For example, if the eligible purchaser has a total tax due of $6000 and qualifies for the full $8000 tax credit then the IRS would send the purchaser a refund check in the amount of $2000 ($8000-6000).
Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the home is less, then it is 10% of the purchase price ($75,000 home = $7,500 credit). The only thing this super-$8000-credit cannot be used to do is help make the downpayment...and Congress tried for that one too but the IRS would have been involved in closing and Congress couldn't find a way to make that easy.
This is a true credit and does not have to be repaid provided the home is occupied by the qualified purchaser for three years (if sold prior it must be repaid). It may be claimed on the 2008 Tax Return (filed by April 15, 2009), an amended 2008 Tax Return or the 2009 Tax Return.
Who qualifies? *First time home buyers only is defined by the IRS as someone who has not owned a home within three years. *A person buying home as the main residence. Vacation or second homes do not qualify. Nor do homes purchased from a close relative ie parent, spouse, grandparent, child. *Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
But time is of the essence for buyers who want to take advantage of this opportunity. Only homes purchased on or after January 1 2009 and before December 1, 2009 are eligible. For the federal website copy and paste: http://tinyurl.com/Liz09
If the 8000 isn't enough incentive to buy a home in our recovering economy, consider also the Federal Reserve Chairman's remarks on our economy. Interest rates are low now but he made it clear there is only one way they will go.
"This decline will begin to moderate and we'll begin to see leveling off...When the economy begins to recover, that will be the time that we need to raise interest rates," Federal Reserve Chairman Ben Bernanke on "60 Minutes" March 15, 2009.
