THE TAX CREDIT FOR FIRST-TIME HOMEBUYERS: 
What Was It and What Is it NOW?
 
WHAT IT WAS . . .
 
2008 Housing Act – Credit for First-Time Homebuyers
  • The single largest provision in the $15.1 billion package of housing tax incentives in the recently enacted Housing Assistance Tax Act of 2008 (The “Housing Act”) was a measure allowing individuals buying their first home to take a tax credit of up to $7,500. Qualified homebuyers could subtract the credit amount from their federal income tax when they bought a home and even get a refund if the credit exceeded the tax due.  
     
  • However, they were then required to pay the credit back over 15 years. The result was that the credit resembled an interest-free loan that had to be repaid to the government. Here were the details of the “Housing Act 2008:”
     
  • The home needed to be located in the U.S. and had to be the taxpayer’s principal residence (main home). The taxpayer (and spouse if married) could not have owned another principal residence in the U.S. in the three-year period before purchasing the new home. Thus, the home did not literally have to be the taxpayer’s first home.
     
  • The home had to be purchased between April 9, 2009 and June 30, 2009, inclusive. Purchases from certain related persons or acquisitions by gift or inheritance didn’t qualify. A home constructed by the taxpayer did qualify if the taxpayer moved in between April 9, 2008 and June 30, 2009.
     
  • A special rule allowed taxpayers who purchased a principal residence in the first six months of 2009 to treat the purchase as if made on December 31, 2008, which allowed the taxpayer to claim the credit for 2008 rather than 2009.
     
  • The credit was equal to 10 percent (10%) of the price paid for the home, up to a maximum of $7,500. The $7,500 maximum credit applied to individuals and married couples filing a joint return. A married individual filing separately could claim a maximum credit of $3,750.
     
  • The credit would be phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. Taxpayers with modified AGI over $95,000 ($170,000 for joint filers) could not claim the credit.
     
  • The credit was refundable, meaning that households with incomes too low to owe any income tax could receive the difference as a refund.
     
  • In the second year after purchase, taxpayers who took the credit would start paying back the credit in equal installments over 15 years, with no interest charge. This would work as follows: A first-time homebuyer could purchase a home for $100,000 by December 2008 and claim the maximum credit of $7,500 on his 2008 tax return. He would then be required to pay back $500 (1/15 of the credit) on his tax return for 2010, and for each of the following 14 years, through 2024. 
     
  • If the taxpayer sold the home (or the home ceased to be the principal residence of the taxpayer or the taxpayer’s spouse) before complete repayment of the credit, any remaining credit was due on the tax return for the year in which the home was sold (or ceased to be the principal residence). If the home was sold at a loss to an unrelated person, repayment of the remaining credit would be forgiven to the extent of the loss.
     
  • No credit would be allowed if: the taxpayer was ever entitled to a D.C. homebuyer credit; the home purchase was financed through tax-exempt mortgage revenue bonds; the taxpayer was a non-resident alien; or the taxpayer disposed of the residence (or it ceased to be a principal residence) in the year of purchase.
 
WHAT IT IS NOW:
 
American Recovery and Reinvestment Act of 2009 – Enhanced First-Time Homebuyer Credit
 
In hopes of spurring the housing industry, the recently enacted “American Recovery and Reinvestment Act of 2009” includes an enhanced tax credit for first-time homebuyers. 
 
Many in the industry had high hopes that the “Housing Act of 2008” would be effective in getting people to buy homes, and thereby reduce the excessive inventory on the market. Unfortunately, the tax credit has been widely acknowledged to have failed in its objective. The problem, according to realtors and industry officials, was that buyers were turned off by the odd way the credit worked. While the credit functioned initially like other tax credits, reducing a person’s tax liability on a dollar-for-dollar basis, it was unusual in that, unlike other tax credits (for example, the child credit), the credit for first-time homebuyers had to be paid back to the government ratably over a period of 15 years (or earlier if the house was sold). 
 
So, as a practical matter, the credit was the equivalent of an interest-free loan from the government. It was the payback requirement that many in the industry felt kept potential buyers on the sidelines. 
 
Now, Congress has beefed up the credit in renewed optimism of enticing more first-time homebuyers to take the plunge.
  • First and foremost, the new legislation scuttles the repayment requirement for homes purchased on or after January 1, 2009.
     
  • The new law also extends the program through the end of November 2009.
     
  • It also bumps up the maximum credit amount from $7,500 to $8,000.
     
  • However, the new law retains the recapture provisions if the house is sold within three years of purchase.