HOUSING AND ECONOMIC RECOVERY ACT OF 2008: First-time Homebuyer Tax Credit

Most of you have probably heard about the Housing and Economic Recovery Act of 2008 that was signed yesterday by President Bush. The act created a tax credit to provide an incentive for first-time homebuyers. The $7,500 credit will be available for the purchase of a principal residence on or after April 9, 2008 and before July 1, 2009.

Only first-time homebuyers are eligible for the credit. A first-time homebuyer is defined as an individual who has not had an ownership interest in a principal residence in the previous three years. The 3-year period is measured as of the date of the purchase of the eligible principal residence.

The income restriction is based on the tax filing status of the tax return the purchaser files. Individuals whose Form 1040 filing status is Single are eligible for the credit if their adjusted gross income is no more than $75,000. Individuals who file a Joint return may have income of no more than $150,000.

The credit is for 10 percent of the cost of the home, up to a limit of $7500.

Generally, a principal residence is the home where an individual spends most of his/her time. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of dwelling.

Eligible property must be located in the United States. Property outside the US is not eligible for the credit.

If the financing is obtained by means of mortgage revenue bonds (i.e., through a tax-exempt bond-related financing program offered by a state housing agency), then the purchaser is not eligible for the tax credit.

The tax credit is a so-called “refundable” credit. Thus, in this example, the purchaser would receive an income tax refund of $1500. The refundable amount is the difference between $7500 and the amount of tax owed.

Unlike most other tax credits, this tax incentive must be paid back. All eligible purchasers who claim the credit will be required to repay it over 15 years. The statute specifies that the repayment amount will be 6.67% of the credit amount each year. Thus, a buyer who qualifies for the full $7500 credit will repay $502.50 each year. There will be no interest charge on outstanding balances.

There is no application or approval process. Eligible purchasers will claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise.

Presently, there is no mechanism available for claiming the credit any earlier than the 2008 tax return that will be filed in 2009. Congress tried to devise a mechanism that would allow pre-funding of the credit, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. If a property goes to settlement on or after April 9, 2008, then an otherwise qualified buyer would be eligible for the credit. Similarly, closings must occur before July 1, 2009 for purchases to be eligible for the credit.

Qualified first-time homebuyers who make their purchase between January 1, 2009 and July 1, 2009 are permitted to make an election to treat the purchase as if it had occurred on December 31, 2008. This election allows them (depending on the timing of the sale) to claim the credit on their 2008 tax return that is due on April 15, 2009. They may also elect to file their 2008 tax return after April 15 by filing for an automatic extension. If they file their 2008 return before they have purchased the home, they may utilize this election and file an amended 2008 tax return.

The repayment feature of the credit is similar to a recapture provision: the tax system takes back all or part of a tax benefit. In this case, there is no precedent for repayment of an individual tax credit, so not much is known about how the repayment will occur, how it will be reflected at settlement or on the sales forms or how the IRS will collect and enforce the payments. The repayment is the equivalent of converting the tax credit into an interest-free loan.

The credit amount is repaid in increments of 6.67% of the credit amount over 15 years. For individuals who take the full $7500 credit, the repayment will be $502.50 a year. Individuals who claim a credit of less than $7500 will also have a 15-year repayment period and will pay 6.67% of their credit each year. For example, an individual who claims a credit of $6000 will repay $400.20 a year ($6000 x .0667). There is no interest charge applied to outstanding balances.
homebuyer tax credit -- features chart.doc