UPDATE: $15,000 Home Buyer Tax Credit possible! Congress passed an $8,000 First Time Home Buyer Tax Credit for 2009. The $7,500 tax credit outlined below will still apply to homes purchased in 2008.

UPDATE 2: The $8,000 First Time Home Buyer Tax Credit Extended the deadline until June 30, 2010. In addition, it will now include a $6,500 Home Buyer Tax Credit for Existing Homeowners.

$7500 Tax Credit. Why are they calling this a tax credit? Have you heard about the new $7500 tax credit for first time home buyers? It’s not a credit at all, it’s a loan! Granted it’s a 0% interest loan, but it’s still a loan. Let’s call it what it is!

$7,500 Interest Free Loan for First Time Home Buyers

A reader that signed up for the Accountants World Daily Newsletter when I suggested the free magazines, sent me the following article: New Tax Credit Can Help Americans Build Long Term Wealth, According to NAHB.

I was skimming it and realized that this is NOT tax credit! Now that we know what it is, let’s look at the details.

What Is It?

It’s a 15 year 0% interest free loan from the government. It’s only called a tax credit because the IRS is handling the distribution of the money. The money will be given to you via a tax credit. You will then repay the loan over the next 15 years through increased taxes.

How Much Is It?

  • You can receive 10% of the purchase price of your home, capped at $7,500.
  • Income phaseouts to qualify for the entire amount are $75,000 for single filers and $150,000 for married filing joint. Partial credits are available up to $95,000 for single and $170,000 for married.
  • It’s refundable, so if your tax liability is less than the credit, you can get the money back.

Who Can Use It?

First time home buyers (a buyer who has not owned a principal residence during the prior 3 year period). For married couples, both of you must be first-time home buyers. The home can also include townhouses, condos, mobile home and houseboats.

How Does It Work?

Purchase your home between April 9, 2008 and before July 1, 2009. (If you build your house, the occupancy date must fall between those dates.) Claim the credit when you file your tax return.

You can claim your First Time Home Buyer Credit on Form 5405. I did a trial entry using TaxCut and it was simple. You just enter your address, date acquired, and purchase price. TaxCut calculates how much of the credit you are eligible for and shows you the payback schedule.

Payback Terms

The credit must be paid back evenly over 15 years ($500 per year for the full amount), beginning 2 years later. If you sell your home before the 15 years are up, you will owe the rest in the year of the sale from the capital gains on the home sale. If there are no gains on the sale, you will not have to repay the rest of the loan.

Special Provision for 2009 Purchases

If your home purchase is in 2009, you can choose to use your income in either 2008 or 2009 to take advantage of whichever year will yield a larger credit. You can also claim it on your 2008 return to get the money sooner.

Should You Use It?

I have no problem with the government giving interest free loans. However, I want everyone to know that is exactly what it is. It is not a tax credit; it is a loan. If you are disciplined and can take the money and put it in a high-yield savings account for 15 years it’s a great source of arbitrage. If you would just spend the money, you may want to skip it and save yourself the trouble.

Article included in Carnival of Personal Finance at BankerGirl.

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Comments to Myth Busted: $7,500 First Time Home Buyer Tax Credit is Not a Credit

  1. “You will then repay the loan over the next 15 years through increased taxes. ”

    Oh great, just what everyone needs, more taxes, more loans, and more government… yeah, THAT ought to pull the economy out of a slump!

    Great find Madison. Nothing like our government trying to pull the wool over our eyes.


  2. @ Ron: It is weird that this was supposed to help with the economy and the housing market slump. Obviously they couldn’t afford a true tax credit.

    I’m glad I checked into all the details on this one!


  3. It’s not really increased taxes, you just pay $500 on top of what you’d otherwise pay… it’s still a win-win for potential homeowners and it does give the housing market some assistance.

    The government may have called it a credit but all the sites clearly state the $7500 has to be repaid.

    jim of Blueprint for Financial Prosperity’s last post: Wordle’s Cool Subject Clouds

    jim of Blueprint for Financial Prosperity

  4. @ Jim: Good point, it’s not technically increased taxes, but just adding the payback to your tax bill…. in the same way that the credit isn’t a credit.

    I still think calling it a “tax credit” is a bit misleading.


  5. Some people could really use help with this, so I think it is fine. No one has to take the credit (aka loan) but I think it is great – it’s about time something, anything, is done for people responsible enough to have not gotten loans that were either too big for them or whatever, causing this meltdown. As Jim said, it’s a win-win for everyone who wants it.


  6. Unlike you, I do have a problem with the “government” providing interest free loans. They are lending money they collect from taxpayers, plus lots of taxpayers (those that are paying the most in taxes) are not eligible for the program.

    Mr. ToughMoneyLove

  7. @ David: I agree that it’s a good thing for many people. I like how you emphasized the responsible crowd.

    I hope I don’t come off that I disagree with the credit, because I don’t. I’m just worried about people misunderstanding how it works, claiming the credit, then not having the money down the road to pay it back.


  8. Very true – I think the people that might misunderstand it are the same type that thought they could get a $500K loan on $35K a year. 😉


  9. I just think it’s hilarious that people are now going to have to keep track of their loan when filing for their taxes each year. One more thing to track — like the use tax 🙂

    Jesse’s last post: What do YNAB and College Football Have in Common? More than You Think.


  10. It really does seem like a first time home buyer should take the deal. I mean $500 now should be worth a lot more now than it will be in 15 years. Take the loan – I doubt you will find any loan like it from a bank!


  11. I’m currently building a house with my fiance. We will be moving in very shortly. We are getting married in October. I haven’t owned a house in the last 3 years. She did own a house until May of 2007. Does this mean I don’t qualify for the $7500 credit anymore?


  12. Seems to me a disciplined person could also use this loan money (if they’re not strapped from closing costs) to pay down their mortgage balance by $7500, reducing the total interest they’ll ultimately pay and increasing their paid principle (that assumes they don’t have a mortgage with a “pre-payment” clause or the kind where prepayment doesn’t reduce the interest you ultimately owe — check first)


  13. Thanks for the extra information. I’m not in the position to purchase a home right now, but I like to stay up to date on stuff like this.

    SavingDiva’s last post: MySurvey Checks


  14. Im a little disapointed with this tax credit….the times that you can qualify for this tax credit-loan is april 9, 2008-july 1 2009 i bought my first house just a week before that….that must mean i don’t qualify….im a single parent, need extra money to have some major work done on this house and i can’t qualify…thanks alot congress and Mr. President….


  15. @ Steve: Looks like you are out of luck. Since you’ll be married for your 2008 tax filing (the status applies to the entire year) it looks like you would both need to qualify, especially since you are building the house together. I can’t find anything that says otherwise.

    @ Daniel: Unfortunately, it’s all or nothing. So if you missed it by a week, you won’t qualify. Uggh, to be so close and not get, that sucks. Congrats on your new house though!


  16. I’ve heard they changed the deadline to November of 2008. Is that true? Does it mean I have to move in by November? My condo will not be done till December.


  17. I was thinking about this. Seems like a neat way to get some insurance against financial hardship, kind of a safety net. I bought my first home in June, with enough money for the down payment, loan, can afford my payments & I have a good paying job, etc. Seems like I could take the credit/loan and hold on to the money in a higher yield account. Say I lost my job next year or had something disastrous happen and needed to sell the house, possibly at a loss. I would have gotten this money and have more cushion than I do now, but wouldn’t have to pay it back if I took a loss on the house if, for instance, home prices continued to go down, etc. I see the point that maybe it’s giving more irresponsible people more money to “think” they can afford a house they can’t, but I think this could be extremely beneficial for a lot of people as long as they understand the terms, benefits & risks.


  18. So, I did the math, and if you put the $7500 in an account that earns 3% apy then make a $500 dollar withdrawal every year to pay for the ‘credit’, in the end, you’re left with $2385 in the account in fifteen years.


  19. Madison
    I am glad to see that you can’t be fooled by this so called credit. The IRS just needs to call it what it is, help in buying a home, nothing more.


  20. Can someone answer this one? On the “First Time buyer” – Loan, it is defined that a first time buyer can not have owned a primary or main residence in the last three years. In 2004 I seperated from my wife and I moved out and had a lease on a rental property that became my primary residence. I still was required to pay the mortgage on the home during the divorse and later ended up loosing the house to my ex in the divorse. The house was refinance without my name and I signed over ownership. Since this was not my residence since 2004 and can prove with utility bills and lease would I qualify for the $7,500.00?


  21. What happens if you took this credit on your 2008 return and then lost your home to foreclosure. Do you still have to pay this back?


  22. I filed for the first time home buyers tax credit in 2010 for the 2009 credit. I was not allowed the clam due to the fact that I was married and my ex wife owned a house. I responded with a letter to the IRS that stated that I had never owned the house and that my ex bought the house before we got married. We did file joint on our taxes though. after that i got a letter like clockwork every 45 days telling me they were still looking into it. I was also requested to send a copy of my divorce papers which i did. Today (1.5 yrs later) i received a letter denying my clam once again. How If I have never owned a house till now am I not allowed this clam??? It makes absolutely no sense to me.


  23. i took the credit 7500 dollars. only to find out 2 years later that i now owe 15 years x500, the whole process was misleading, basically lied to by goverment!

    tom lamphier

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