Chicago Area First Time Home Buyers – TAX Credit info – (updated)
12th August 2008
Update 02-14-2009
As part of the new stimulus bill, the First Time Home Buyer Credit was altered and the credit raised from $7,500 to $8,000 (This is 10% of the purchase price up to a maximum of $8,000). As originally written, this credit would be taken in the first year but have to be paid back over the next 15 years, so it was more of a no interest loan than a true credit. That has been changed and it is now a full credit as long as you stay in the home for at least 3 years. The credit is good for any first time buyer who buys between January 1st and December 1st of this year and is available for singles with income up to $75,000 per year, and married couples with income up to $150,000.
One of the biggest provisions of the recently signed housing bill is a first time home buyer tax credit of up to $7,500. This credit is available for anyone who 
has not owned a home in the last three years and is designed to jump start the housing market and give first time home buyers a reason to get off the fence and in to the game. A lot of real estate companies have been pushing this credit as a no-brainer – free money from the government. I think there are some great benefits to this credit, but I have some mixed feelings on it – or at least the way it is being promoted. This is really an interest free loan, not a true credit, and it will need to be paid back over time. Still, an interest free loan is a heck of a good deal if you treat it as a loan. You just need to understand how it works and what it will mean for you not only now, but in your future planning.
First of all, you need to know how exactly the credit works.
It is available for first time home buyers only – this includes anyone who hasn’t owned a home in the last 3 years.
The credit is for 10% of the purchase price for a maximum benefit of $7,500 – If you buy a home for $75,000 or above the credit is $7,500.
The credit is only available for homes purchased between April 9, 2008 and July 1, 2009 – this applies retroactively.
The credit is capped out based on income. Single taxpayers are eligible up to $75,000 income and married couples with incomes up to $150,000 will receive the full credit.
The credit needs to be paid back over the next 15 years at the rate of $500 per year (for the maximum credit).
Those are the basics, here are the details. You will still need a down payment when you buy. The credit doesn’t kick in until after you file your taxes the next year. The tax credit is applied to your overall tax bill. So if you put together your tax return and you would normally owe $6,000, you will get a refund of $1,500 back. If you would normally receive a refund of $1,500, with the tax credit added back in you now would get $9,000 back. This money is yours to do what ever you want with it. But again, there is a catch. This isn’t a real credit, it’s an interest free loan.
Starting the following year you will need to pay back the credit over the next 15 years. If you received the full $7,500 this means you will have $500 more on your tax liability for the next 15 years until the loan is
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paid in full. A dollar today is worth more than a dollar next year, so this is still a great deal. Here is where I see the problem, though. Most first time home buyers don’t stay in their first homes for 15 years. Five years is much more likely. So if you bought the home and sold it 5 years later you would have paid back $2,000 of the credit (you skip the first year). That means you still owe $5,500 to the IRS, though the loan will be forgiven if you sell without making a profit.
It makes sense to take the credit. Free money, even if you have to pay it back, is hard to pass up. But make sure you consider this when it’s time to sell. If the credit means you will walk away with less cash to put down on your new home, that’s a problem you need to address. If it means that you use your sale proceeds as a down payment and then have a major tax liability when you file your taxes the next year, that’s a bigger problem. Even more so if you don’t have other savings to pay the tax bill.
This credit is a great opportunity, but make sure you understand the implications. Tips
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