Update February 17, 2009: The American Recovery and Reinvestment Act has modified this tax credit posted here. If you're a first time home buyer who purchased January 1, 2009 – December 31, 2009; click here. If you purchased from April 9, 2008 – December 31, 2008; this post still applies to you.
Please check with your CPA or tax advisor to see how this impacts you.
With the recent passage of HR 3221, people who have not owned a home for the last
3 years may qualify for an interest free loan from Uncle Sam of up to $7,500. Here's a quick skinny on how this works:
First time home buyers may receive a tax credit of up to 10% of the purchase price of the home (not to exceed $7500). This is a "tax credit" meaning that you receive the credit (if you want it) after you file your income taxes. For example, this means that when you file your taxes in 2009 and you owe $5,000 to Uncle Sam and you qualify to have a tax credit in the amount of $7,500; you would receive a refund of $2,500. However, this is a refundable credit (aka interest free loan) that must be paid back each year to the IRS (when you file your taxes) over the next 15 years.
If you sell your home before the tax credit is repaid to Uncle Sam, then the full amount is due or if your property that you received the tax credit for is no longer your primary residence (i.e. you convert your home to a rental).
This credit does not apply if the first time home buyer is buying a home from a relative.
This tax credit is only available for purchases made between April 9, 2008 and July 1, 2009 for adjusted gross incomes of up to $75,000 ($150,000, if married, filed jointly) and phases out up to $95,000 ($170,000, if married, filed jointly).
Should you take advantage of this opportunity?
Sure! Who wouldn't want a $7,500 interest free loan? Two things I would consider using this credit for if I were a first time home buyer:
- investing into an interest bearing savings account to build my "emergency fund".
- pay off a nasty high interest credit card (freeing up a monthly cash flow).
- fund your IRA.
Just understand that this is essentially an interest free loan. This is not "down payment assistance". You will be paying this back over the next 15 years (or sooner if you sell, rent out the property or convert it a second home)…but you just can't beat "interest free".
For more information, click here.
Friendly reminder: I am not a tax professional, I am a Mortgage Planner assisting families who need mortgages in beautiful Washington State. Always consult with your CPA, financial or tax advisor.
Watch for more posts on the effects of HR 3221.
Hey Rhonda,
Thanks for posting this article. Has there been any talk about the ability to make additional payments throughout the year. Lets say I want make additional monthly payments to pay it off faster. Is that possible?
Patrick, that’s an excellent question. The payments are made when you pay Uncle Sam income tax. You could probably pay it off sooner by paying more than what’s due at tax time (check w/your CPA). Buy why do that when the money is interest free?
You can use this money to fund your IRA…invest and earn interest on it…etc.
Rhonda, do you happen to know if the first-time buyer credit would apply to a duplex which would be owner-occupied?
Clifford, when I check out the site (which is linked in my article) it does not reference 2-family…please check with your tax advisor/CPA to make sure an owner occupied duplex qualifies.
April 9 seems a very random date for this to start. And very unwelcome, as we closed on April 2. 🙁
Mike B, I agree! I had several clients who closed in the first week of April–why not at least go back to April 1, 2008 if not January 1, 2008. ARGH!
Recently I was at a seminar where the presenter gave some bad facts on the tax credit…here is some additional tidbits for you (in case you were there or if you’ve heard some wrong info):
~any type of financing can be used for the FTHB (fha, conventional, private)…all that matters is that the home buyer has not owned a home in the past 36 months. In fact, the home buyer DOES NOT NEED financing–they could be a lucky person who paid cash for the home they’re going to live in.
~ FHA is not just for first time home buyers.
Okay…I feel better now…I wanted to correct the presenter; but it wasn’t the time or place.
Hi Rhonda, if I just graduated from college and am a first-time homebuyer and my mom was co-signing on my loan and she already owns her home, does that disqualify me from the tax credit?
Guest, your question is excellent and I’m consulting a CPA for their opinion. I’ll let you know as soon as I have an answer.
Guest…I’m still waiting on the CPA’s answer. If you need one right away, please contact your CPA for their opinion. As soon as I have more info, I’ll write a new post.
Hello Rhonda and thanks for answering all of these questions, you are very helpful….Say I get the “loan” and in 2010 start paying it back. For example, if I am to get $1000 back from the government that year, will the $500 I owe for the loan (per year) be automatically taken away my $1000 refund (resulting in a $500 refund) or do I have to pay Uncle Sam another way?
Chad,
I believe so. If you were to receive $1000 as a tax refund when you begin to repay the FTHB tax credit, your refund would be reduced by $500; leaving you a refund of $500 based on your example.
(BTW…I’m still waiting on the answer from the CPA for “guest”).
Hi Ronda, My boyfriend is going thru with a divorce right now and we are just waiting for it to be final. He just got the home in July, evrything that was done on the paper work was single. If evrything is final by Dec 08 will she get anything or will he get the full amount back? We need to no asap. We just put in about 6,200 of work into the house and out it on a credit card. so it has to payed for in a year… Thank you for your time..
Andrea, it depends on if your boyfriend has owned a home in the 36 months prior to the home closing in July. If he owned a home over the last 3 years (married or not) then he won’t qualify for the tax credit.
If he has not owned a home in the past 3 years, then he should qualify. The credit will not be received until after you file your 2008 taxes AND receive your “refund” from the IRS. Then you’ll be paying it back over the next 15 years.
Do we have to pay any money up front for the Tax Credit? Or is it similar to a loan?
Thank you…. They never owned a house. I just wanted to make sure that he will get the whole amount back even if they file joint, but she has nothing to do with the house. But if evrything is done before then i dont see any reason why he would not get the whole amount….
Andrea, as long as he has not owned a home in the past 36 months and as long as the home is priced $75,000 or more, then he should qualify for the $7500 tax credit.
Ben Brown,
You do not pay money upfront. You “apply” when you file your income taxes after you purchase a home. This is a tax credit so you will repay this when you file your income taxes.
Do contact your CPA before you purchase a home if you are counting on receiving the tax credit.
This credit will be good for FTHB’s that have a 401k. They can borrow $7,500 and repay it when they get their tax return. For homes under $225,000 this can be thir 3% investment.
Tom, your correct, the 401k loan could be an advance on the tax credit since the home buyer won’t receive the credit until they receive their income tax refund the following year.
Guest (from September 10, 2008) would you believe I’m still waiting on my CPA? When we met with him earlier this month he said they had not received their guidelines from the IRS on this matter. His GUESS is that you would qualify for half or the entire amount…I will follow up when I have a better answer. In the meantime, please contact your CPA directly.
So if I’m already only getting half of my refund each year due to student loans in default and my husband filing an “injured spouse” form and we do qualify for this credit, I should only get half of the $7,500 as well or will they take it all?
Kim, please check with a CPA. Your scenario sounds too complicated for someone who speciality is mortgages and not taxes.
This is a credit and it’s not mandetory. If you owe Uncle Sam $5000 and you qualifed for the $7500 credit and elected to use it, you would receive $2500 (vs paying the $5k you owe).
Again, please check with a CPA regarding your personal scenario.
Thanks for trying to answer my question.
Rhonda,
I am in the military and i purchased my home in Aug 2008. I was wondering since i applied for a VA loan will i still qualify for the first time home buyer tax credit?
Hi Steve, it doesn’t matter what type of mortgage you’re using to buy your home as long as you have not owned a home in the past 36 months.
Good luck and thank you for serving our Country.
Rhonda,
If I owe taxes on both the federal and state level for 2008 will this rebate cover both?
Thanks!
My husband and I are purchasing our first home and do not quite understand all there is to this tax “credit” (loan). Where we live the city is trying to up sales and economic standing here by providing a down payment as a forgivable interest free second mortgage. This part of the financing is MRB but our part of the loan is FHA. Our question is whether we could still receive this credit. I have called several tax offices and either they are not open yet or have no idea what an MRB is. In the research I have found MRB financing excludes a filer from the credit. So we are a bit confused. Thanks if you can shed light on this matter.
Jim, this is a federal tax credit, so if you owe on your federal taxes, the credit could be applied to reduce that amount (if you qualify for the first time home buyer tax credit).
For example, if you owed $5000 to Uncle Sam for federal taxes, and you qualifed for $7500 for the FTHM tax credit, you would receive a credit of $2500.
Keep in mind, this is an “interest free loan” and you will be re-paying this over the next 15 years back to Uncle Sam when you file your federal tax returns.
Elizabeth, according to the Federal Housing Tax Credit website, if you are purchasing your home under a mortgage revenue bond (MRB) program, you will NOT qualify for the tax credit: http://www.federalhousingtaxcredit.com/faq.php#13
Sorry!
So…. I seem to fall in the group of home owners that closed in the “black hole” of programs. This would be any mortgage that closed 1/2/08 – 4/8/08. For some reason this 3 month window of mortgage holders dont qualify for anything. The tax credit would be of SOOOOOO much help to me right now. One source said to fight the tax credit. I have no idea how to do that? any thoughts
Josh, I suppose you could write to your elected representatives who passed this. For the life of me, I don’t know why they didn’t go back to January 1, 2008 and where the April 9, 2008 date comes from. I have many clients, like you, who were left out.
Hello Rhonda. Very informative site!
I had a quick question about the loan, which you seem to be pretty knowledgeable about. I closed on my home 2 weeks before the cut-off date, but recently refinanced. Would the new closing from refinancing qualify me for the tax credit now?
Thanks,
Jillian
Jillian, unfortunately the settlement statement from your purchase will be used to determine the cut-off date. Not the refinance. So as the law currently stands, you would not qualify for the tax free credit (IMO).
I read something that stated if you owned a previous home that is rental property that it doesn’t disqualify you from being able utlize the first time home buyer tax credit. I have a home that’s been a rental for a few years, and I’ve recently purchased a new home. Would I qualify??
Cory, per the FTHB web site (link is in the post):
“What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase…. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.”
I’m in the process of buying a home, hopefully. I’ll be able to get it in February. Am I entitled to a tax credit if I buy my house in 2009, since I am filing a 2008 tax return?
yul saba, I believe you’ll be able to apply for your tax credit when you file your 2009 taxes. You’ll want to verify this with your CPA or tax advisor.
What is considered a relatvie? A great Aunt?
Blake, which comment are you referring to?
I was wondering if I bought my house from my Great Aunt if I would still be eligable for the tax credit? Or is that considered to close of a relative?