Wednesday, September 3, 2008


I've fielded several questions lately on the $7,500 first-time buyer tax credit that was part of the housing bill the President signed in July.

A quick primer:

* First-time buyers (defined as those who have not owned a home in the past three years) who purchase a home between April 10, 2008 and June 30, 2009 are eligible for a $7,500 federal tax credit on their federal tax return

* If your outstanding tax liability at the time you file your taxes is less than $7,500 (and for almost all first-time buyers, it is well below this amount), you will receive a check back from the government for the difference between what you owe and the $7,500 offered in the credit

* Beginning with the following tax year, the tax-credit recipient "repays" the $7,500 tax credit in $500 increments over a 15-year period

* If the home is sold prior to the time your credit is repaid, the balance of the credit is accelerated and due for the tax year in which you sell your home, unless you take a loss on the property, in which case it is forgiven

So as you see, the $7,500 tax credit is much more like a 15-year interest free loan. It's nice to have money coming back (for possible upgrades and home improvements?), but it's a loan, not a gift.

As always, I recommend you speak with your tax advisor or accountant for specific details.

A couple of thoughts about the tax credit:

* While an interest-free loan is not as nice as a pure tax credit, you do get to take the money in today's dollars in repay it without any adjustment for inflation

* For young families and those just starting out, the $7,500 can be very helpful in solidifying your finances during the early years of homeownership

* If you are looking at foreclosures (and a lot of people are), this money can go toward your rehabilitation and improvements of the property

The tax credit is a tool, not a gift. But it does give you the ability to make some strategic decisions about managing your finances, and options are never a bad thing to have.