New Housing Credit for First Time Homebuyers

This summer, the United States Congress passed, and the president signed, the Housing and Economic Recovery Act of 2008. Aimed at shoring up the faltering national housing market by stimulating sales, the prime component of this act is a $7,500 tax credit to home buyers who have not owned a home in the last three years. Since this is a credit, most eligible tax payers will be receiving large checks from the IRS, not just a smaller tax bite. At first glance, this appears to an ideal program, and it may very well be. But there are several details that buyers must understand, or they will be confronted with possible unpleasant surprises in the future.

First, a few facts regarding this law: All US citizens who file tax returns are eligible to participate. The home must be located in the U.S. and be the taxpayers prime residence. To receive the entire credit, your gross annual income must be less than $75,000 if single or $150,000 for those filing joint returns. If your income is higher than these limits, then the credit is pro-rated. 

As with all real estate transactions, time is of the essence. The home sale must close after April 9^th of this year and before July 1, 2009. Buyers can elect to take the credit on either their 2008 or 2009 federal tax return. This way, buyers can purchase a home in early 2009 and then take the credit on their 2008 return that is due on April 15, 2009, if they so desire. 

In reality this Federal tax credit is an interest free loan. If the taxpayer takes the entire $7,500 credit, then it must be paid back at $500 per year over the next 15 years. Most importantly, and this is where people will get into trouble, if the home is sold or is no longer your prime residence, then the loan is accelerated and becomes due in the that tax year. If the home is sold for a loss, then the loan is forgiven, up to the amount of the loss. Remember, this is a tax credit up front, but a tax obligation to the IRS thereafter.

In my opinion, the great fault in this program is that this tax debt is attached to the taxpayer, not the residence. There is no lien file at the courthouse as there is with other taxes and obligations related to home sales. Consequently, if you sell your home for a profit after three years of making your annual payment of $500, you will owe the IRS $6,000. But it is not due until you file your return. Many may not have the discipline to put this money aside until due. If they spend the money and then come up short when the taxes are due, they will be hit with crushing penalties and interest. This could become a financial nightmare for some as the IRS is very good at collecting money and has a long memory. 

On the whole I believe this is a good program and will help us weather this market upheaval. But there are risks and pitfalls for the unknowledgeable and undisciplined. As with all major financial transactions it is best to get professional advice from your attorney and tax accountant. Terry can be reached at terryburns@windermere.com