If you like the idea of an interest-free loan to purchase a car, how about an interest-free loan to help pay for purchasing your first home?
Congress has passed the Housing and Economic Recovery Act of 2008 that authorizes a $7,500 tax credit for qualified first-time homebuyers purchasing homes between April 9, 2008, and July 1, 2009.
Homebuilders and Realtors have high hopes that the first-time homebuyers credit will help reduce the inventory of homes on the market. And if people are able to sell their starter home to a first-time home buyer, then the seller may be able to move up to a bigger home, stimulating real estate sales twice.
“We are seeing more traffic because of it,” said 2008 Mississippi Association of Realtors president Gwen James, who is president of Coldwell Banker Don Nace Realty Hattiesburg. “We just got it in our Sunday ad to let people know about it. It doesn’t seem like it is hitting the news media like so many things do. But it is a good stimulus.”
Stages to home ownership usually start with first-time buyers, and then extend to expanding families, empty nester families and then sometimes retirees. So it is important to get that first domino in the process — purchase of a first home — started, James said.
Those eligible for the credit that can cover up to 10% of the house purchase are single people with $75,000 or less annual income, and married couples with less than $150,000 in annual income. There are higher income increments allowed depending on the number of children.
Pay back but no interest
“You do have to pay it back over 15-year period, but it is interest free,” James said.
James encourages people to go to their CPA to see how this could impact their tax situation.
The tax credit could be the opportunity of a lifetime for some people, said Marty Milstead, executive vice president, Homebuilders Association of Mississippi. And it could help stimulate the sluggish home sale market.
“In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales,” Milstead said.
People can qualify even if they have previously purchased a home. The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. You can even own a vacation home or rental property as long as it is not used as a principal residence.
Milstead said participating in the tax credit program is easy.
“You claim the tax credit on your federal income tax return,” he said. “No other applications or forms are required. No pre-approval is necessary. However, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests.”
Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house — if there is sufficient capital gain from the sale. At the sale of the home, the remaining credit amount would be due from the profit on the home sale. But if there is no profit on the sale, then the remaining credit payback would be forgiven.
If the full $7,500 credit is claimed, it must be repaid at the rate of $500 per year. Repayments credits start two years after the credit is claimed, so repayments for a credit taken for 2008 wouldn’t have to be repaid until 2010.
The money must be repaid because it was the intent of Congress to provide as large a financial resource as possible for homebuyers in the year that they purchase a home.
Easing Treasury pressure
“The repayment requirement reduces the effect on the federal Treasury and assumes that homebuyers will benefit from stabilized and, eventually, increasing future housing prices,” Milstead said.
Because the money must be repaid under most circumstance, the program is really a zero-interest loan rather than a traditional tax credit. Interest savings can be considerable. For example, assuming an interest rate of 7%, the homeowner saves up to $4,200 in interest payments over the 15-year repayment period.
“Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers more than $8,100 in interest payments,” Milstead said.
Types of homes that qualify include not just single-family detached homes, but also attached homes such as townhouses and condominiums, manufactured homes and even houseboats. People who build their own home qualify, as well as those who purchase a new or existing home.
Prospective homebuyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding.
“Reducing tax withholding up to the amount of the credit will enable the future home buyer to accumulate cash by raising his/her take home pay,” Milstead said. “This money can then be applied to the down payment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding.
It is important to remember that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
The homebuyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Milstead said typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
“For example, if a qualified home buyer expected federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th,” Milstead said. “If the taxpayer qualified for the $7,500 home buyer tax credit, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed).
A tax credit is not the same as a tax deduction. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
Milstead recommends people interested in the tax credit seek the advice of a tax professional.
For more information, visit the website www.federalhousingtaxcredit.com.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.