First Time HomeBuyer Tax Credit

WHAT IT IS. The 2008 Housing Act gives first time homebuyers a tax credit of up to $7,500 if they close on a home between April 9, 2008 and June 30, 2009. The actual amount of the incentive is 10% of the purchase price up to a maximum of $7500.

Note that this is a tax CREDIT not a tax deduction. This means that the gov't will give up to $7,500 to the qualifying first time buyer. To the extent that the credit exceeds any tax due, the gov't will send the buyer a check.

WHO QUALIFIES. To qualify for the credit, the buyer cannot have owned a principal residence in the U.S. in the three years prior to the purchase. Also, the credit is phased out for individual tax payers with an adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers).

THE PAYBACK. The tax credit is actually a 15 year interest free loan. In the second year after purchase, the buyer must begin to pay back the credit/loan in equal installments over the next 15 years. If the buyer sells the home or it ceases to be the buyer's primary residence, before complete repayment is made, any remaining credit shall be due on the tax return for the year in which the home is sold. On the maximum $7,500 credit, the payback would be $500 per year.

HOW IT CAN HELP. The limitation of this incentive is that the funds are not available to the homebuyer at the time of closing, the funds come later when the buyer fills out his/her tax return. How can this incentive motivate buyers to buy if the money is not available to get them through the closing? I have three ideas:

1. Prospective buyer can borrow money from relatives for the closing and pay it back from the tax credit, as long as the buyer's mortgage lender's approves.

2. The buyer can immediately reduce his payroll tax withholding to the extent that the credit will cover the decreased tax payments. This will put extra money in the buyer's pocket each payday.

3. The buyer can buy a home that needs some work, knowing that he/she will have the tax credit money to pay for some repairs or remodeling. This may allow the buyers to consider homes that they otherwise would not consider. For example, the credit could potentially pay for a new roof or water heater, or siding.

Anyone have any other ideas on how the credit can help get buyers into houses? I love to hear them.

Jim Miner

The Law Office of James M. Miner, LLC
Westfield Office Short Hills Office
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