Summary of first-time homebuyer tax credit |
| By Marcie Geffner
• Bankrate.com |
| If you're planning to buy a home in the next
10 months, you may be eager to take advantage of the federal government's latest
effort to jump-start the nation's moribund housing markets: A tax credit of up
to $7,500 for certain homebuyers.
The credit may appear to be an attractive opportunity, but you
should be sure you read the fine print before you elect to claim it on your federal
tax return. "The big story is that it is not a credit. It is
a loan, and you are going to have to pay it back, so you'd better make sure that
you have the money," says John W. Roth, senior tax analyst at CCH Group, a Riverwoods,
Ill.-based company that provides tax software, services and information. "If
you claim the credit, you could end up with some tax issues a couple of years
down the road because of the tax liability, and if you sell the house, there is
a possibility that you could have a bigger tax bill." With
that warning in mind, here's a summary of the rules.
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| First-time homebuyer tax credit rules | |
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1. The tax credit
is not a deduction, but rather a true credit in the sense that your federal
income tax liability will be reduced dollar-for-dollar up to the amount of the
credit you're entitled to take. For example, if you owed federal income tax of
$8,000 and you took the maximum credit of $7,500, your tax bill would be cut to
$500. The credit is also refundable: If you owed, for instance, $1,500 in income
tax and, again, you took the maximum credit, your tax liability would be zeroed
out and you'd get a check for $6,000 from the government. 2.
The tax credit is repayable to the federal government. The total credit
is divided into small bits of 6.67 percent, each of which is due annually for
15 years.
“The big story is that
it is not a credit. It is a loan.” 3.
If you sell your home before the 15 years are up, the remainder of the
credit that you haven't yet repaid will become due. If you sell your home at a
loss, the government will write off the balance of the credit that you still owe. 4.
The credit also will be written off if you die before it's repaid. Special
rules apply to transfers of property between spouses or incident to divorce; or
if the home is subject to "involuntary conversion," such as being destroyed by
a natural disaster; or is seized by a government authority though the exercise
of eminent domain. 5.
The tax credit is restricted to "first-time homebuyers," but the definition
includes anyone who didn't have an ownership interest in a principal residence
during the prior three years. If you're married, you and your spouse must fit
that definition. An ownership interest in an investment property or vacation home
is not a disqualification. The rules aren't entirely clear as to how the tax credit
will be allocated if two unmarried people buy a home together and only one of
them meets the definition. 6.
The tax credit may be taken only for the purchase of a principal residence,
which means a home where you plan to live most of the time. The home may be a
detached house, condominium, town house, manufactured (aka mobile) home or houseboat.
It must be located in the United States. A home purchased from a "related party"
(e.g., a parent or sibling) is not eligible. | 
