$7,500 IRS First Time Homebuyer Tax Credit Explained

What is this mysterious $7,500 IRS Tax Credit for First Time Homebuyers you may have heard about? Who qualifies? How does it work? Do you have to pay it back? Is it a good deal? How can it help borrowers afford a new home? Can it reduce the burdens of the new down payment requirements?

Wow! That’s a lot of questions. I bet you didn’t think you had that many questions about something you may not even know about. But you do, and I’m here to answer them.

First of all, who qualifies?

• First time homebuyers (defined as “haven’t had ownership interest in a home in the past 3 years”) who buy a home to live in between April 9, 2008 & June 30, 2009.
• Individuals earning up to $75K and couples earning up to $150K can take the full credit.
• Partial credits allowed to $95K individual & $170K couples.

You’re not eligible if you are a non-resident alien, use State Bond funds to finance the home, buy the home from a relative, or your spouse has owned a home in the past 3 years – even if he/she isn’t on the new loan.

How this Tax Credit Works

How does it work? If the purchase price is at least $75,000, you can take a $7,500 tax credit when you file either your 2008 or 2009 taxes. What’s a tax credit? A simple example is: Let’s say you did your taxes and were going to be due a $500 refund. When you add the $7,500 credit, you’ll now get an $8,000 refund. Boom! All at once.

Do you have to pay it back? Yes, you do. Starting two years after you get your check, you start paying back 1/15 of the credit (that’s $500 a year if you get the full $7,500 credit) each year for the next 15 years (yes, there’s rules for selling early which I won’t go in to here). So in our above example where you would have gotten a $500 refund – you’d get zero refund instead that year.

Is it a good deal? Absolutely! A tax-free loan and a 2 year gap before you have to start repaying it over the next 15 years? Cool! And this could make the difference between being able to buy a home or not being able to buy a home. Or be super smart and use the $7,500 to fund an IRA, college fund for the kids, or other investment account (Spending it on a wide screen tv is discouraged).

How can it help you buy a home now? Maybe you don’t qualify for one of the down payment assistance or zero-down loan programs right now, and you need to come up with a down payment in order to buy. Maybe you can borrower $7,500 from your parents or take a loan against your 401K plan – and as soon as you file your taxes, you’ll have the money to pay them or it back right away. Or maybe the payment on the new home is going to stretch your budget a little more than you’re comfy with? Could you use that $7,500 to pay off a car loan or credit card, freeing up some extra money each month for the house payment?

Disclaimer: I’m not a tax accountant or attorney and I cannot offer legal or tax advice. But I can encourage you to check this out to see if it’ll help you buy a home.

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