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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2008

First-Time-Homebuyer Tax Credit: Who it Helps

In addition to rookie borrowers, brokers and the economy could stand to benefit

The Housing and Economic Recovery Act of 2008, passed in July, includes a first-time-homebuyer tax credit. Mortgage brokers should understand whether their clients are eligible for the tax credit, as well as how the credit will benefit them and the economy as a whole.

The housing bill allows first-time homebuyers to claim a tax credit of 10 percent of their home purchase to as much as $7,500. Most homebuyers will receive the full $7,500 tax credit. This credit essentially is an interest-free loan for those who qualify and must be paid back over a 15-year period.

Because it is designed to stimulate demand for housing and shore up home prices nationwide, this tax credit also can benefit more than just the first-time homebuyers who receive it.

Claiming the credit

To be eligible for the first-time-homebuyer tax credit, your customers must fall into one of the following categories:

  • They have not owned a home in the past three years or have never owned a home.
  • They buy their home between this past April 9 and this coming July 1.
  • They are not nonresident aliens.
  • They aren't using a state or local-agency tax-exempt mortgage-revenue-bond program.
  • They plan to live in the property they are purchasing as their primary residence.
  • They are not residents of Washington, D.C., using the district's credit program for first-time buyers.

Eligible clients can claim a federal tax credit of 10 percent of their property's purchase price to a maximum of $7,500. Closing costs are counted as part of the purchase price. For buyers with adjusted gross incomes more than $75,000 if single or $150,000 if married and filing taxes jointly, the credit starts to phase out. The credit is not available for homebuyers with adjusted gross incomes of more than $95,000 for single buyers or more than $170,000 for married homebuyers who are filing jointly.

Homebuyers can claim the tax credit on their federal income-tax returns. Buyers who purchase their home in 2009 can even take the credit against their 2008 taxes by filing an amended 2008 return to claim the credit, or they can wait until they file their 2009 taxes. The 2008 and 2009 federal income-tax forms are being modified to allow first-time homebuyers to claim the credit on their taxes.

Tell your clients to keep in mind that they must repay this tax credit over a 15-year period. Starting in the second tax year after the home purchase, the tax credit must be repaid on a pro rata basis via the borrower’s federal tax return.

For instance, borrowers who receive the full $7,500 credit will pay $500 per year for 15 years, assuming they stay in the home for that long. Borrowers who sell before the 15-year repayment period ends must repay the outstanding credit from the profit of their sale. If they do not realize a gain on their sale, they will not owe the balance of the credit.

Multiplier effect

As it helps more homebuyers afford housing, the first-time-homebuyer tax credit likely will have a multiplier effect on the housing market. For instance, when homeowners can sell their homes, they can in turn buy new homes.

Although it is unclear how large a multiplier effect will be derived from the homeowners who become sellers and then buyers again, it could help stabilize the housing market.

It's likely that the multiplier effect will be most noticeable at the lower end of the housing market. This is because of the tax credit starts to phase out for borrowers with incomes more than $75,000 for single homebuyers or $150,000 for married homebuyers filing jointly.

All segments of the housing market could experience a windfall from the tax credit, however. Consider an entry-level homebuyer who could not purchase a first home without the tax credit. Now, that entry-level buyer can purchase a starter home from a family who could now sell their home and move up to a midpriced property. Neither of those transactions would have happened were it not for the tax credit.

In a real sense, then, the tax credit is helping to provide liquidity to the housing market.

Further, the fact that these transactions are completed generates economic activity. Mortgage brokers, appraisers, real estate agents and a host of other professionals were paid commissions from the transactions. Some may use those commissions as part of a downpayment to purchase their own home.

Certainly, they will spend some of the money they made as commissions on goods and services, which creates jobs for the employees and profits for businesses that offer those goods and services.

At least some of that economic activity will manifest itself in direct demand for residential real estate, which will help to support housing prices.

Mortgage brokers also can indirectly benefit from the first-time-homebuyer tax credit. For instance, it could be enough of an incentive for clients who may be ambivalent about purchasing homes to move forward with a transaction. Thus, this allows you to close the transaction and get paid.

By understanding the first-time-homebuyer tax credit and the effect it can have on your clients, as well as on the economy and your business, you will further position yourself as an expert.


 


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