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

UPDATE: $15,000 Home Buyer Tax Credit [1] possible! Congress passed an $8,000 First Time Home Buyer Tax Credit [2] 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 [3] the deadline until June 30, 2010. In addition, it will now include a $6,500 Home Buyer Tax Credit for Existing Homeowners [4].

$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 [5] when I suggested the free magazines [6], sent me the following article: New Tax Credit Can Help Americans Build Long Term Wealth, According to NAHB [7].

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 [8], 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 [9] and it was simple. You just enter your address, date acquired, and purchase price. TaxCut [9] 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 [10] 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 [11].