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Up to $7,500 tax credit for certain home buyers

Posted: December 10, 2008 8:34 p.m.
Updated: December 11, 2008 4:30 a.m.
 

If you haven't owned a primary residence for three years or more, you need to read this.

I just got back from my annual income tax update tax course that runs two-and-a-half days. Among the myriad information presented, I discovered one piece of new tax law that might be beneficial for first-time home buyers in particular.

In an effort to get home sales off the ground again, the Federal Government has created up to a $7,500 "tax credit" for what they call first-time home buyers. I have a son and daughter-in-law who are in the process of buying their first home.

I can't wait to tell them about this additional financial benefit provided for in the Housing Assistance Act of 2008. The particulars are as follows:

For qualifying home purchases between April 9, 2008 and July 1, 2009, eligible first-time homebuyers get a refundable tax credit equal to the lesser of 10 percent of the purchase price of a principal residence or $7,500. The only way the tax credit can be less than $7,500 is if the total purchase price of the home is less than $75,000. So for here in Santa Clarita, let's just assume the tax credit will be $7,500.

So how does one collect this tax credit?

Answer: On his, her or their tax return. It is a refundable tax credit, meaning the tax credit will be paid out even if there is little or no tax liability reported on the return. For example, if the taxpayer has only a $500 tax liability with $500 withholding to offset the tax liability, the taxpayer will receive a refund check from the IRS for a total $7,500.

Who qualifies: A principal residence buyer must not have owned a principal residence for a three-year period prior to buying the qualifying residence. So this credit applies to more people than just "first home-buyers." Wow!

There are a couple of caveats, however:

n There are income limitations. The credit is phased out for individual taxpayers with adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) in the year of purchase.

n This credit is actually a long-term interest-free loan from the government. The credit is paid back over a 15-year period with $500 per year (assuming the credit was the maximum $7,500) paid through future tax returns starting in the second year after home purchase. Still, this is a very attractive offer.

Here is a provision I really like: If a home is purchased in 2009 (before the July 1, 2009 deadline) the taxpayer can elect to treat the purchase as though it were made on Dec. 31, 2008, and take the credit on their 2008 return. Wow! So this means that if you are a qualified home buyer and purchase a home in the first half of 2009, you can apply the $7,500 tax credit on your 2008 tax return. Talk about instant gratification.

If you are a first-time home-buyer or haven't owned a home in three years and thinking of buying a home, check with your tax advisor/preparer about this new tax credit (actually interest-free loan). You'll be glad you did.

D. Frank Norton CPA, MBA, CFP, is a money manager and financial planner in Santa Clarita. His column represents his own views and not necessarily those of The Signal. "It's Your Money" appears Thursdays and rotates between a handful of the Santa Clarita Valley's financial professionals.

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