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$7500 First Time Homebuyer Tax Credit

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Farm House with Rising SunUpdate 2/12: The $15,000 provision has been replaced by an $8,000 first-time home buyer credit, according to the Wall Street Journal. The credit is set to expire November 30th unless it is extended (which is currently being discussed).

Senate Republicans added a provision that would make the credit a $15,000 tax credit for all home-buyers, not just first time home-buyers. It would also be a true credit, not a “credit” you have to pay back over 15 years.

One of the big pieces of the housing rescue bill, passed and signed into law in July, was a $7,500 “tax credit” for first time homebuyers. While experts aren’t sure whether it’s “going to work,” these types of tax credits have been used in the past so they do have some history.

There is one aspect of this bill that is surprising and it has to do with one of the qualification rules. You can own a vacation home or a rental property and still qualify for this tax credit. I don’t know if it’s an oversight because of the strict determination of “primary residence” or if it was an intended rule. I don’t think individuals who own rental property or vacation homes necessarily need assistance on buying a primary residence.

First Time Homebuyer Tax Credit Rules

To qualify, you must satisfy these conditions:

  • The home much be purchased as a primary residence.
  • You must not have owned a primary residence in the last three years. For couples, both individuals must not have owned a primary residence in the last three years. Vacation homes and rental properties don’t affect this (you aren’t DQ’d if you have a vacation home or rental property).
  • Must not be a non-resident alien as defined by the IRS in Publication 519.
  • Individuals must have a modified adjusted gross income of less than $75,000 annually and couples MAGI of less than $150,000 to qualify for the full amount.
  • The phaseout range begins at $75,000 and ends at $95,000 for individuals, $150,000 and $170,000 respectively for couples.
  • The home must be closed between April 9th, 2008 and July 1st, 2009.
  • No mention of a credit score or history requirement, but knowing that will help when it comes to getting a mortgage. I recommend checking out myFICO.com, a service of Fair Isaac, the people who invented the FICO credit score.

How the “tax credit” works:

  • The tax credit is 10% of the home’s sale price with a maximum of $7500.
  • You can claim the credit on taxes filed in 2008 or 2009.
  • It’s a credit and not a deduction (difference between tax credit and tax deduction).
  • “Tax credit” is a misnomer because it’s really a zero percent loan with some qualifications.

Tax Credit Loan Repayment Terms

The tax credit isn’t really a tax credit, it’s really just a tax free loan with some qualifications. You have to start paying back this loan within two years and you make equal payments over 15 years. When you sell your home, any profits will go first into paying off that loan. If you sell at a loss, the difference will be forgiven… meaning you will not owe any money on the loan (though it should be recorded as income as is typical with most loan forgiveness agreements, so you will owe taxes on it).

Should You Do It?

I would, why wouldn’t you take an interest free loan? :)

(Photo: orvaratli)

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1,255 Responses to “$7500 First Time Homebuyer Tax Credit”

  1. ash says:

    Okay, so my husband and I bought and closed on our house december 2008, we recieved the fthbc of 7010.00 which was 10% of our house price. we sold that house december 2009. and bought another house. when we sold the house we filed our taxes and let h & r block know we sold it and we owed the 7010.00 we made a basically that profit on the house. we sent the irs the money. about a month later i get a check in the mail for 7010.00. so i sent it back because I knw we owed it and they sent it back to me, and said I overpaid. after we ammended a few things they said we didn’t owe it. in 2010 we ot our repayment letter for the yearly installment to be filed when we file our 2010 taxes so we had our tax guy not hr block because they messed up stuff, our tax guy filed the form and they took out the 500.00 installment from the refund. havent received anything else from them but im afraid they might say now they want their ? Do you think that I should just keep making the installments each year and hope they dont send anythin out. How do they know when your sell your home anyway? Any advice would be great

  2. Bob & Debi says:

    I, Bob, purchased a home in my name only (without my spouse’s name on it) in 2008 and used the “First Time Home Buyers Credit” for $7500. Unfortunately, the house was foreclosed on in 2010 and we had to ‘vacate’ in Feb. 2011. I hadn’t filed Federal Income Tax for 2010 (no stories, or excuses!) until recently, which is when I found out about the “repayment” plan (of which I had no idea about – like many people I’m sure as that little gem wasn’t exactly prevalent – but “Oh Well”. It is what it is!!). Anyway, the $500 was taken out of our refund (which the balance of went to the State anyway, so no biggee!). Now, finally(?) to our dilemma; My wife (yes we’re still together – lol) is now trying to purchase a house in her name only, which she has qualified. We just had to extend the REPC (purchase contract) @$375 nonrefundable (after having put down $1000 earnest money) so we could take advantage of the FHA 203K Streamlined Program and are hoping to close the first week in March. However, we were hoping to use our 2011 Income Tax Refund as our 3% downpayment (Yep, it’s only an $81K house + $32K (the FHA 203K Streamlined Program for renovation(s) repair(s) replacement(etc.) = $113K, but now we’re afraid that is going to go away and not just the $500 but the entire $7500 is due because I lost the house with less than 3 years occupancy. Even though the downpayment is only around $3000, it might as well be $3,000,000!! Any help and advice would be Xtremely appreciated!!
    Bob & Debi

  3. Bob & Debi says:

    Whoops!! I, also, just made a duplicate comment. Sorry, I didn’t see the comment after I thought I hit the “Post Comment” button, so I didn’t think it went through. Again, Sorry!!

    TO ALL FUTURE POSTERS: If you don’t see your ‘post’ right away after posting, don’t worry ’bout it! Evidently the folks at “BARGAINEERING” know what their doin’!
    Bob

  4. Anonymous says:

    I’m looking for anyone that met all the criteria, followed all the rules, has been making the annual $500 installments, and the IRS is now either holding their tax refund or saying that the entire amount is due. This happened to my daughter and son-in-law and it is ruining their finances. The IRS made the mistake, and admit mistakes were made, but want the money back anyway. What’s up?

    • Anonymous says:

      My son and daughter-in-law are going through the same thing. They qualified for first time homebuyer credit, were to start making the $500 installments but they sold the house at a loss because they could not afford it. Although they filed the appropriate paperwork they sold it to someone not related and at a loss, the IRS for 2 years took out the $500 installment. Now they received a letter wanting it all back with interest and penalties. We sent a letter to the IRS along with backup attachments as to why they are wrong and they do qualify for the credit and do not need to repay it but the IRS sent a letter received today saying they reviewed it and it stands as is, they want all their money back, no explanation as to why. Help!!

  5. Such programs like the tax credit are in of themselves great ideas to promote home ownership. However, government programs almost always seem to be improperly managed.

  6. Kay says:

    Sorry for the duplicate. I never saw the other post. : (


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