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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Farm House with Rising SunUpdate 2/12: The $15,000 provision has been replaced by an $8,000 first-time home buyer credit, according to the Wall Street Journal.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. Your comments about the “ignorant” folks who responded to this scam sickens most of us. Anyone who addresses the public in this manner reeks of of even worse ignorance.

    The entire financial construct in the what used to be a great country preys on the so called “ignorant”.

    Tell us oh wise one…where does one go to get the the truth? Congress? a real estate agent? a lawyer (you know, the crooks that make these phony laws), maybe umpteen thousands of pages of tax code? The president? financial institutions? erudite people like yourself who are gifted with such celestial wisdom?…have a heart attack.

    • Clinton says:

      If you are referring to my comment, I was only saying that one would have to be ignorant to think they could sue a person for receiving a credit. The people whom got the credit in 2009, didn’t do anything wrong. I also used the term “Ignorant” because it describes a person whom has not learned, I could understand your comment if I had used the word “Stupid” because that term means one can’t learn.

      Also, this credit was in no way a scam! If you’re a former number cruncher then you of all people here should know that! The terms of the credit “Loan” were right there in black and white and everyone had the opportunity to take it or not. With that said, I’m sure that some Real Estate agents took advantaged of people and mislead them into believing that this was free money. Though if one would have looked to the IRS to confirm, then they would have known that it wasn’t free money. So, the IRS didn’t lie or scam anyone!

      You asked: “Tell us oh wise one…where does one go to get the truth?” The “Truth” can be found in knowledge! Don’t sign into something that you don’t understand! You may find yourself “Paying” for it.

      • no brainer says:

        Wow Clinton,what planet are you from. It has nothing to do with not knowing what you signed. It has to do with turning around the very next year and there after, offering this freely. People would have liked to sign on to the free credit if that indeed had of been availabe. There was no choice then, nor any offer in sight of that but the 2008. It does not have anything to do with lack of graditude or stupitity. It’s the principle. If your going to offer someone something don’t turn around and rob them the next year with a better offer for others. If you had a choice which one would you have picked? I wonder.

  2. Ramki says:

    I know I have to repay the credit over time or in 1 payment if the house ceases being my primary residence. This is my situation and my question. I bought the house in Aug 2008. Live there until July 2010 and had a change in job that required me moving to NC. I am currently renting in NC. Since I moved out in Aug 2010, the house has been listed in the market as a short sale for a much lesser amount. Now in Jan 2011, the house is still in the market and all this while has been un-occupied (Not a rental or a vacation home). Even if my house closes sometime this year, i know I am going to be taking a loss of more than $7500. So, assuming I pay this $7500 now and sell the house for a loss, will the IRS give me back the $7500 if I amend the return? Any useful answers are highly appreciated. Also, in the repayment form, there are different types of dispositions and none of them apply to the situation I had mentioned above. Can I still consider my house as my primary residence? or am I just required to pay the $7500 and move on? Please advise.

    • Clinton says:

      Unfortunately Ramki you will have to repay the credit in full. You may have already found the answers you’re looking for, but I would assume that you will not get that money back on your 2011 return.

    • Dixie says:

      Agreed..you answered your own question. And the form 5405 does have your correct disposition. You moved out and the home stopped being your primary residence. Therefore, repayment is required. The way Congress wrote the law, unless you sell in the same year you vacate the home, you won’t be able to use the “sold at a loss” disposition change.

  3. Alvin says:

    It is really messed up how we were all tricked. I may have held out on my decision to buy at the time i did. Or at least thought about if i should take the so called “tax credit” that was a cleverly disguised name for a tax loan. I used the money to pay bills. Now I’ve learned that I robbed Peter to pay Paul and created another bill. Fortunately, it’s interest free, but unfortunately, we were misinformed and made a 30 commitment based on false information. I wish my GOVernment worked like my GOD. lol…
    Thanks for listening.

  4. mike says:

    My wife received a letter from the IRS stating she must start repaying the 7500 this year. In her letter it only show a balance of half. Will (should I have) receive the same letter. I guess what Im asking is, does the it get spit between both of us or do we only owe half?

  5. michael says:

    I bought a house in June 2009 and filed an amended 2008 return for the credit. Will I have to pay the tax credit back?

  6. Jessica says:

    I am in the same boat as Mike. We too got a letter, back in Novemeber that we only owed half of the amount we thought. Tonight when we went to file at HandRBlock, they said the forms needed to repay the loan was unavailable and that we had to wait for Feb 15th for the state to finalize the bill stating the correct amount. (Not only that.. HandRBlock are in the middle of a lawsuit, so they are way over charging in my opion for the RAL not even being available…) I cannot find anywhere that we should be having to wait, we were also told that we cannot file our state taxes without the federal…The IRS says nothing about all this on their site, it doesnt make sense!

  7. Clinton says:

    Here is a copy and paste that should help most everyone.

    Q. What are the exceptions where I may not have to repay the full credit?

    A. The exceptions where you may not have to repay the full credit are:

    * If you (transferor spouse) transfer your home as part of a divorce settlement, your former spouse (transferee spouse) who keeps the home is responsible for making the rest of the repayments and you are not responsible for making any remaining repayments.
    * If your home is destroyed, condemned or disposed of under threat of condemnation and you purchase a replacement home within two years, you continue to repay the credit in installments each year.
    * If you lose your home in a foreclosure sale, you repay the credit only up to the amount of the gain.
    * If you die, no further repayments are due. If you claimed the credit on a joint return, your surviving spouse pays only his or her half of the remaining credit repayment amount.
    * If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain, if any, on the sale. Note: when calculating gain or loss on your main home if you received the credit, you reduce your basis by any remaining amount of the credit. See Publication 551, Basis of Assets, for more information.

    • mike says:

      I’m not necessarily asking if I have to repay the full amount. I have no problem paying back what I borrowed. I’m asking why did I receive a letter stating my wife only owes half and I didn’t get one that says the same.? Should I call some one? WHATS UP?

      • Clinton says:

        You can call but I can save you some time. You both owe half and your notice either hasn’t made it yet or was lost in the mail. Essentially, you both owe half and you’re being billed separately.

        The IRS does it this way, so that if you get a divorce or one of you were to pass away, the other person is liable for their own debt and not their spouses. When you file your 5405 you will report the total sum of the credit, if you file together.

        Not everyone has to pay this credit back! If you sold your home without a gain, then you may not have to pay it back. Foreclosed and sold is the same things to the IRS. If you bought for $75,000 and your home was foreclosed on with a remaining balance of $65,000. then you made no gain and therefore are not required to repay the credit. That’s just an example, there are many ways the formula could work with the same end. NOT everyone has to repay!

        • mike says:

          Thank you Sir! All the help is appreciated.

        • Anonymous says:

          We were relocated last year due to military PCS and have been paying for our home but not using it as our primary residence…we also just rented it out this Jan. 2011….I was wondering if military has to pay back tax credit at all or is it just deffered?…because when I was looking over the form to repay… it has a box that says something like “did the military relocate you?”…. we clicked yes…and it added back the 500 to our refund…weird….

  8. Morgen says:

    Mike, my husband received his letter from the IRS first stating that he owed half of the loan and then a few months later I got a letter in the mail saying that I owed the other half. Almost as if they thought we were divorced or something is what the lady at H and R Block told us. I just brought both of my letters in with me and the correct amount was already in their system (the total of both bills).

  9. Kerry says:

    I took the $7.500 in 2008 and was glad to get it and still appreciate the fact that it helped with painting and getting new windows. I am not sorry about it it just frustrates me that whats is good for the goose is not good for the gander here, we took our “credit” when this recession was in it’s infancy, I was not really even aware of it but the Government was or they would not have offered it, they “tested the waters” with the first of us, well unfortunatly many of us lost our jobs, or health or what have you. . so the simple point is this recession affected us just as much as anyone else so why did they not make this a true credit when they realized just how bad it was or was going to get? Everyone should pay it back or no one should. . thats about it.

    • Clinton says:

      I agree with you for the most part and I feel for your situation. If you lost your home without a gain though, you may not have to repay the credit.

  10. aj says:

    Me and my husband purchased a house in 2008 and got the loan also. We are being told that we have to pay the loan back also. I really don’t understand why they are making us pay back the loan…I thought it was not supposed to be paid back?

  11. Cliff says:

    People, you need to stop blaming the government for your lack of financial responsibility. The same people making silly comments that they signed papers and didn’t understand what they were signing are the reason the real estate market had the bubble that was built on people not reading the contract they were entering into. If I told you you could walk into a bank a get a 0% loan for a 15 year term with a maximum amount borrowed of $7,500 would you be complaining? I have to pay my $7,500 back, and yes it would be nice to not pay it back. It was a good deal at the time, but it became a great deal later on! I’m still happy with the deal I received.

  12. Calan says:

    Well I for one am pretty pissed off. I closed on December 29th, 2008. I have to payback the loan. I don’t think that it is fair. People who purchased their homes in November/December of 2008 were also purchasing their homes during the recession– we’re in no better shape financially than those who purchased in 2009. The point was an incentive to get people to purchase homes during a recession– well the banks crashed early fall 2008– so those who purchased in November/December of 2008 were also choosing to buy homes in a bad economy– they should be rewarded as well.

    BUT, the worst part about it– is that the government encouraged that people could use the credit to make necessary home improvements! hah! great– so we received 7500.00 to pump into our homes that were about to depreciate 50-100! It’s not a loan as far as I’m concerned– I’ll never see that money– I put it into a house that quickly depreciated. The government should allow everyone off the hook due to the fact that all of our houses are worth 80% of what they used to be.

    Let’s face it– in 2008 when they had it– no one knew the recession would be THIS bad and last THIS long and affect the housing market this much…now that we do, the government should change the rules on the 2008 credit.

  13. Calan says:

    the problem is that the government just doesn’t care. There’s no incentive- There’s no incentive to take away the pay-back clause on those who have already signed. There is incentive to take it away moving forward (into 2009) because it gets more people to buy homes. The government doesn’t care about those who have already bought them. It’s like insurance and phone companies who give the best deals to new customers and never reward the existing.

  14. Question says:

    My ex-husband purchased a home and we and got the tax credit in 2008. We have since divorced and the home was foreclosed on last year. How do I determine what we will owe? Do they just split it and we each pay half? Thanks for any help

  15. Anonymous says:

    Why can’t my daughter and her husband take the first time homebuyer’s tax credit because they are buying the home I had on the market? they still had to get a FHA loan. I didn’t own the house, my mortgage company still had the title.

  16. Marina says:

    I agree and I can relate to those who bought a house in 2008 and have to repay the $7500. We bought ours in Sept 2008. It is unfair and absurd. Whether it’s too late or not, I am sending a letter to the President and to our state Senator and Congressman to ask them to amend this tax credit so we don’t have to repay this $7500 for fairness, not a handout.

  17. Puzzled says:

    My husband and I bought a home in 2008. We were grateful to get the $7500 loan and split it 50/50. We have since divorced and in the divorce settlement, he did a quit-claim deed, although he is still on the mortgage and I am in the house desperately trying to keep up the payments. If I understand you, Clinton, this means that although he did not stay the prescribed 3 yrs in the house, he is getting off scot-free from the repayment? Why should he be rewarded for breaking the terms of the repayment through divorce? If this so, seems like an easy way out of paying the loan and dumping responsibility. Is there anything I can do?

  18. David says:

    I, like all of you, are in the same boat. I bought a pad in June 2008 but new a free $7500 was too good to be true. I moved back to California in late 2009 for a better job and life (as i’m so not Texas) and got the “letter”. I’m single and claim zero on everything and was set to get back about $5000. I kept my house in San Antonio as that market is recession proof (relatively) and eventually, I would make money on it. I rent it through an agency and it’s doing pretty well, with only a minor monthly loss.

    Being said, I assumed it was a “credit” as well, but just knew in the back of my mind that something like this would come about. I’m still waiting on my 1099 from my rental agency & will have to take a $5000 tax gain into owing about $3000 give or take. Like most of you, am a Turbo Tax guy and actually enjoy doing my own taxes.

    Mad ? Well at first, a little bit, as we all spend our tax money in our mind before getting it. Overall, i’ll live, as my goal someday is to have 3 homes, live in one, & rent the others, as overall, in the long run, it’s a sound investment.

    I’m only 40 years old & thank god am very good with money, keeping some extra cash put away for rainy days. This was a little larger than planned, so will just have to adjust life a little bit or sell some stuff on Craigslist or Ebay to make up some difference.

    It happens, we all know better, it sucks, but what can you do really. If I raise a stink or lie on my taxes, i’d be the first guy they lock up (punk rock kid covered in tats with a boston accent lol).

    One thing that gets me, is, as stated by another poster, i’m one of the “good guys”. I didn’t want to foreclose, I wanted to keep & rent. I believe people like us are part of the solution, not the problem. I’m renting to a military family in Texas, helping them out, as they are helping me out. I’ve never been late on any payment for my house, and never will, but as stated, this is the thanx we get.

    So be it, it sucks, but have to take it in stride, as we all know, nothing is for free…

    Thank you,
    David

  19. tina says:

    Hey tax diva and the other rude idiots who like to call us names for receiving the tax loan. I work 3 jobs and get taxed up the ass have no life and get absolutely no help on anything from the precious govt. I see maurons who work less then me get back 3 times more then me a tax time with no repayment and you call that fair? I detest the tax system and i hope you geniouses get laid off.

  20. salina says:

    TAXDIVA or anyone else that could help….Me n my husband had filed married jointly n got the 7500 loan but we have been separated since last year so we filed separate last year w no problems. But this year I went to do my taxes n since this year we start paying back the loan the tax preparer told me we have to file married joint so we did cause figured we have no choice but we r separated so how can I fix this so we can file separate n both of us just pay half? They haven’t even sent our taxes out to be filed cause we have to wait til feb 28 is it to late to change anything ot try to file separate??? Please help

  21. money hungry says:

    hello all i received the loan enjoyed very much spending it. Now, i have to pay it back . sucks balls . good thing im not the only one paying it back which i thought i was. hehehe

  22. Supermanzded says:

    I took the 7500 and I understand i have to pay it back, however do I have to pay 500 each year or can i choose not to pay it this year due to unemployment and just opt to pay 1000 next year, since it says must be paid back in 15 years?

  23. Natalie says:

    Hello!
    Ok, so my husband and I bought a condo in August of 2008, and lived there until Sept. of 2010. We decided to rent it out, and move in with my husband’s parents.
    Anyway, let me make it perfectly clear that we were well aware that we had to pay it back (starting after 2 yrs of ownership), and that’s what we were expecting to start paying this year. I am not complaining about the terms, just to be clear.
    So, to make a long story short, our accountant just informed us that we are now required to pay back the entire $7,500 as a lump sum, instead of “in payments”. Is there some way to get around that, or are we kinda stuck?
    Ps: we are not interested in selling.
    We’re kinda bummed out, but I’m not a pessimist, so I almost see it as a blessing in disguise. I am somewhat happy to get it done & over with, you know?
    Thanks in advance for any feedback.

  24. Robs says:

    How does the IRS determine if the home is still your primary residence? I closed on my condo in June 2010, and have lived there ever since with a roommate, who is paying me monthly to help with the mortgage payments. I am planning on leaving the country in September to teach abroad in Ecuador for 9-10 months. My plan was to have renters in the apartment while I was gone to cover mortgage expenses. If I keep my name on bills and utilities for the apartment, can I still claim it as my primary residence, rather than as a rental property?

    • Mic says:

      Don’t change your mailing address or take off your homeowner’s exemption and they probably won’t find out.

  25. richard says:

    I don’t mind paying the loan back but making us wait till feb 15 to file our taxes because they won’t accept the payment until then is rediculous


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