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The Housing and Economic Recovery
Act of 2008 was just signed into law. One of the major
provisions provides a $7,500 tax credit to qualified
First Time Home Buyers (as well as those who have not
owned a home in the last three years).
Here's an explanation of how the new
Housing Bill works for first time homebuyers:
TAX CREDIT ($7,500) WORKS LIKE AN INTEREST FREE LOAN
Purchasers can shave as much as $7,500 off their IRS
bills, though it must be repaid.
WASHINGTON -- Anyone who's been sitting on the sidelines
hesitant to jump into the housing market until
conditions settle down should know these dates: April 9,
2008, through June 30, 2009.
They mark the eligibility period for the home purchase
tax credit created by the housing bill enacted last
week. If you have not owned a house during the last
three years -- or are considering buying a first home --
and you close on a purchase before the end of next June,
you may be eligible for a credit of as much as $7,500
against your federal taxes for 2008 or 2009 ($3,750 if
you file taxes as a single person).
The new tax credit is expected to benefit hundreds of
thousands of buyers. Here's an overview of the
specifics.
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The basic idea: To jump-start
housing sales and clear out stocks of unsold real
estate, Congress is offering tax credits to
encourage new purchasers. Buy any house -- new, old,
in any location or condition for any price -- within
the designated time period and the IRS will cut as
much as $7,500 off your tax bill this year or next.
For example, if you're an eligible buyer of a home
this year and you owe the IRS $4,000 on your total
2008 income tax bill, your $7,500 tax credit could
wipe out everything you owe plus get you a $3,500
refund.
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Eligibility rules: If you own a home
now, you're not eligible. If you sold your home more
than three years ago and now rent, you are eligible.
The same is true if you've never owned a home. Close
on a house before next June 30 and you can claim a
credit of up to 10% of the purchase price to a
maximum of $7,500.
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If your adjusted gross income
exceeds $150,000 ($75,000 for singles), the credit
maximum begins to phase down. You cannot claim the
credit if you financed the property using a state or
local housing agency's tax-exempt bond mortgage, or
do not plan to use the house as your principal
residence.
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Payback: Unlike some past tax
credits, this one must be repaid over an extended
period. Starting in the second tax year after
purchase and continuing for up to 15 years,
taxpayers are expected to make pro-rata repayments
to the government on their federal filings. Over a
15-year payback period for the full $7,500 credit,
the cost would be $500 a year.
If you sell the house before the end of the
repayment period, and you have no gain on the sale,
you won't be expected to repay the remainder of the
credit from the proceeds. If you have a net gain,
the "recapture" cannot exceed the amount of your
gain. In other words, the federal government is
taking on all or much of the risk that the value of
your new house won't increase over time.
At its core, the new tax credit works very much like
an interest-free loan. You pay the principal back in
increments over time, but there's no interest charge
to you.Quick Reference Guide:
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FEATURE |
H.R. 3221
Housing and Economic Recovery Act of 2008
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Amount of Credit |
Ten percent of cost of home, not to exceed $7500
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Eligible Property |
Any single‐family residence (including condos, co‐ops) that will be used
as a principal residence.
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Refundable |
Yes. Reduces income tax liability for the year of
purchase. Claimed on tax return for that tax year.
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Income Limit |
Yes. Full amount of credit available for individuals with adjusted gross
income of no more than $75,000 ($150,000 on a joint return).
Phases out above those caps ($95,000 and $170,000, respectively).
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First Time Home Buyer Only |
Yes. Purchaser (and purchaser’s spouse) may not have owned a principal
residence in 3 years previous to purchase.
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Recapture |
Yes. Portion (6.67 % of credit) to be repaid each year for 15
years. If home sold before 15 years, then remainder of credit
recaptured on sale.
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Effective Date |
Purchases on or after April 9, 2008
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Termination |
July 1, 2009
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Interaction with Alternative Minimum Tax |
Can be used against AMT, so credit will not throw individual into AMT.
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