People are extolling the new first-time-homebuyer tax credit, but is it too good to be true?
Chan B. Masselink, president, Falls Mortgage LLC
As published in Scotsman Guide's Residential Edition, October 2008.
The U.S. housing market continues to show signs of downturn. Many economists say this will continue until 2009 or 2010.
In response, Congress recently passed legislation to try to strengthen the housing and mortgage industries and provide them stability, support and resources while the market continues toward recovery. In July, President George W. Bush signed this legislation -- the Housing and Economic Recovery Act of 2008 -- into law.
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The new housing bill has many parts. One that is expected to have a particular impact on mortgage brokers and lenders, as well as homebuyers, is an Internal Revenue Service (IRS) first-time-homebuyer tax credit.
Mortgage brokers would be wise to understand what the tax credit entails, as well as its positive and negative aspects. With this knowledge, you can best help your clients determine if this tax credit -- praised by many in the industry -- is too good to be true.
What are the essentials?
The new housing bill implements a temporary first-time-homebuyer tax credit for the purchase of a principal home. This includes detached single-family homes, attached townhomes and condominiums. The definition even covers a principal home for taxpayers who own secondary or vacation homes but who are presently renting their principal residence.
The tax credit is capped at 10 percent of the purchase price to as much as $7,500; most first-time homebuyers will receive the full credit. For purchase transactions less than $75,000, the credit is 10 percent of the purchase price.
The new law defines a first-time homebuyer as someone who has not owned a principal residence during a three-year period before purchase. For married taxpayers, if either spouse has owned a principal home in the past three years, the IRS will disallow the credit. Also, homeownership traditionally is defined as being "in title" or being a party on the deed on a principal home.
Further, the date of purchase is critical. To qualify for the tax credit, a home purchase -- or the date of the closing -- must occur between this past April 9 and this coming July 1.
In addition, the tax credit is refundable. Taxpayers can claim the credit with or without income to offset. For first-time homebuyers, the tax credit will either offset existing tax liability in the taxable year, or a tax-refund check will be mailed to them.
Brokers and their clients must keep in mind that this is not a cash credit at closing like lenders and brokers may be used to seeing on settlement statements. First-time homebuyers must claim the credit on their tax returns.
Lost in the accolades of this credit is the fact that it works like a zero-interest "step" loan. First-time homebuyers must repay it in full to the government, without interest, over a 15-year period or when they sell the home, provided that equity remains after the sale. If there is no equity remaining after the sale, the government will absorb the deficiency.
Repayment starts two years after buyers claim the credit. Assuming the full tax-credit amount of $7,500 is claimed, this will result in a $500 per annum payment to the IRS for 15 years.
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