It's official, the $7500 tax credit for first time buyers is now law. But how will it work?
First of all, it's not really a 'credit' per se -- it's an interest free loan. Nonetheless, as my first time buyer clients will tell you, an interest free loan is the best kind of loan! First time buyers -- defined as buyers who have not owned a principal residence during the 3 year period prior to purchase -- will claim this credit on their tax returns, and receive a credit of 10% of the purchase price, up to a maximum of a $7500 'credit.' (Note this is NOT a deduction. Taxpayers receive the full $7500.) Here are the additional details:
- All homes, including condos, are eligible.
- The 'loan' part comes into play because it must be repaid over a 15 year period at $500/year starting in 2010.
- The purchase must be on or after April 9, 2008 and before July 1, 2009. (Note the law says BEFORE, so those of you buying next year - settle on or before July 1!)
- There's an income restriction: Single taxpayers can't make more than $75,000 and married couples are limited to $150,000. Above those limits, the credit is phased out.
- Sorry, DC home buyers, you can't claim both this and the DC First Time Buyer credit. (That one is a real credit, not a loan, so for almost everyone the DC credit is the better deal.)
- There doesn't appear to be any way to get the money in advance, so this credit will have to be a 'reimbursement' of sorts for buyers. You can however, as with any purchase, adjust your withholding to better match your (now $7500 lower) tax bill. The closest thing you can do to getting it sooner than later is to buy a home in early 2009, but then you apply the credit to your 2008 return (before April 15) since the law allows you to choose the year in which you apply the credit.
Update 1/29/09: President Obama's $820B stimulus package contains a proposal to eliminate the need to repay the $7500 -- it would change into a straight on credit, rather than the interest free loan it currently is. This bill has passed the House and is currently with the Senate -- the bill is NOT yet law. Stay tuned.