As a part of the Housing Assistance Tax Act Of 2008 (H.R. 3221) a refundable tax credit is available to first-time home buys up to $7,500. Generally speaking, the credit is the lesser of $7,500 or 10% of the home's purchase price; he home must be a principal residence and purchased after April 8, 2008 and before July 1, 2009; and the credit also phases out when your adjusted gross income (AGI) is between $75,000 to $95,000 for singles and $150,000 to $170,000 for married filing joint. The credit is refundable, meaning, even if you have zero taxable income and zero tax you would be eligible to receive the entire credit as a tax refund.
However, there are a few items to consider before rushing out too purchase a home using this tax "credit". The title of the First-Time Home Buyer credit should be "The advance loan at 0% by the US Government". This tax "credit" has to be completely repaid by the taxpayer over 15 years. In the first year the taxpayer may receive a benefit of $7,500, but over the past 15 years the taxpayer will have to repay the "credit" $500 a year. A taxpayer claiming this credit might be extremely happy during the first year, but may regret the decision over the next 15 years. The benefit can be viewed as borrowing $7,500 over 15 years with no interest. For example, using an annual compounding rate of 6% the interest savings is $4,083.
Another consideration by the taxpayer is should they purchase a house? In a challenging economy is the best personal financial decision for the taxpayer to purchase an asset which may decline in value (or may not increase in value), can the taxpayer afford the extra costs in owning a home (utilities, repairs, maintenance, etc.) and\or increase their debt levels? Of course, there are other benefits from owning your personal residence such as a safe place to raise a family, being more connected to your local community and other potential tax benefits related owning a home such as the potentially having ability to itemize your tax deductions.
The First-Time Home Buyer credit is an example of buyer be aware! A home purchaser should seek counsel with there tax advisor and financial planner before determining their purchase decision. Also, the home purchasers should be aware of the profit-motives of their advisor (i.e. how does the advisor get compensation and does this interfere with the advisor acting in their best interest).
Mark Wyssbrod, Pro@ctive CPA, has been helping small businesses achieve their goals since 1999. His proactive philosophy stems from the fact that traditional tax preparers are usually simple historians who react to their client's prior and current positions. Such a reactive stance means trying to fix mistakes after those mistakes are already made. Mark would rather prevent any mistakes in the first place. You can reach Mark at (770) 664-8583.
Internal Revenue Code, H.R. 3221
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