IRS Announces Tax Credit To Aid First-Time Homebuyers

by Mike Godfrey, for LawAndTax-News.com, Washington

17 September 2008

First-time homebuyers should begin planning now to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008, the Internal Revenue Service (IRS) has announced this week.

Available for a limited time only, the credit:

• Applies to home purchases after April 8, 2008, and before July 1, 2009.
• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of USD7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or USD500, as an additional tax on his or her 2010 return.

Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.

Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009.

Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.

The credit is 10% of the purchase price of the home, with a maximum available credit of USD7,500 for either a single taxpayer or a married couple filing jointly. The limit is USD3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing USD75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

The credit is reduced or eliminated for higher-income taxpayers.

The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer’s income tax return for that year.

For example, if individuals properly claim a USD7,500 first-time homebuyer credit on their 2008 return, you will begin paying it back on your 2010 tax return. Normally, USD500 will be due each year from 2010 to 2024.

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