In Plain English, The Housing & Economic Recovery Act of 2008

We’ve all heard about it on the news now for weeks, but exactly how will it affect you. Well if you are a first time home buyer you will receive a $7,500.00 tax credit if the home you purchased closed before July 1, 2009. That sounds great, but is it only for the home buyer who has never owned a home before? The answer to that is a simple, no, a first time home buyer is defined as, “A buyer who has not owned a principal residence during the three-year period prior to the purchase”.

So, if you owned a home four years ago and it was your principal residence of record, sold it and then rented for the past three years, you are eligible for this incentive to now buy another home.

Now that some real estate markets that are beginning to stabilize and we are seeing the “bottom” in pricing, this could be the door opener that is needed to cash in on a great purchase.

Let’s examine this a little deeper. In order to receive this tax credit you must have purchased your home, single-family detached, townhouses, condominiums, manufactured homes, or houseboat, between April 9, 2008 and July 1, 2009. The definition of purchase is the closing date. Yes, you read the above correctly, I did say, houseboat.

The government has even stream lined this process for you to collect. You simply claim the tax credit on your federal income tax return. That’s it, no confusing complicated paper work to go through. You must meet the income requirements though. For a single person the adjusted gross income is $95,000 and for married $170.000. Even if you are over on these limits, you still may still be able to receive a partial tax credit. Consult your accountant.

Now the government even allows you to access these funds quickly, instead of waiting for you to file your tax return at the end of the year. Buyers who believe they qualify for the tax credit are allowed to reduce their income tax withholding. A taxpayer who can reduce his or her withholding will have more money on the take home side of the table. This new found money can now be used to help with the down payment or closing cost. If you elect to reduce your withholding you should adjust the amount on your W-4 through your employer, or through your quarterly estimated tax payment. IRS Publication 919 contains rules on income tax withholding that you should read.

Now, so far all this sounds pretty good, right. There is a catch to this Act that you should be aware of though. Remember, it is only a tax credit, this means that you must repay the government over the next 15 years, or when the property sells if there are sufficient capital gains.

An example of how this tax credit really works: A home buyer who claims the tax credit ($7,500) would need to repay the credit at a rate of $500 per year, interest free. You do not have to start marking these payments until after two years of claiming the credit. If you claimed the tax credit on your 2008 return, then your first payment would not be due until the 2010 tax return is filed. If you sell the property, the remaining credit would be due from the profit of the sale. If there was insufficient profit then the remaining credit payback would be forgiven.

Why is this repayment due? Remember, it is only a tax credit, not a deduction. The government is hoping that this credit will be enough to stimulate the housing market, and perhaps turn the economy. I guess they are thinking that by providing a financial boost to first time home buyers, free of interest, it could be just what the doctor ordered to turn the economy around.

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