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Update 2/12: The $15,000 provision has been replaced by an $8,000 first-time home buyer credit ^[3], according to the Wall Street Journal.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 ^[4], 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 ^[5], 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 ^[6].
• Individuals must have a modified adjusted gross income ^[7] 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 ^[8], 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 ^[9]).
• “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 ^[10])