First-Time Homebuyer Credit – Is It Really a Free Lunch?

I was vaguely aware of the first-time homebuyer tax credit offered by the Government but never really paid much attention to it. I certainly wouldn’t be eligible for it since I have owned my home for a long time and have a number of investment properties as well. My real estate holdings are, for the most part, single-family homes that I have rehabbed and rented but rarely sold.  So for me the tax credit was never in play. 

However, I was recently approached by one of my tenants about buying the home he was renting. I was definitely open to the idea of selling since I had a substantial profit and a sale would free up cash for other acquisitions. In the discussion the first-time buyer credit came up and I realized that I needed to learn more about it, as it could be a factor in the purchase. A tax credit has a much greater impact than a tax deduction. A tax deduction of $1,000 for someone in the 25% tax bracket is worth $250. A tax credit is a dollar for dollar reduction in the amount of tax owed, so a $1,000 tax credit is worth $1,000.

The Specifics

The credit was one of the provisions of the Housing and Economic Recovery Act of 2008. While it is called a first-timer buyer credit, it is available to anyone who hasn’t owned a home for the three-year period prior to the current purchase of a home. This means that people who have owned a home before can still qualify as long as they haven’t owned one recently. The credit is equal to 10% of the purchase price and has a maximum limit of $7,500. So a home purchased for $50,000 would result in a credit of $5,000, any purchase of $75,000 or more would receive the full $7,500.

The full tax credit has income limitations. Single taxpayers earning $75,000 or less and married filers earning $150,000 or less can receive the full amount. Those with higher incomes may qualify for a partial credit or no credit at all. The credit is available for homes purchased between April 9, 2008 and June 30, 2009. Unless extended, the credit will expire on June 30th.

The Catch

There really is no free lunch here. The tax credit is really nothing more than an interest-free loan. The credit must be repaid over a fifteen-year period beginning two years after the credit is claimed. So you receive $7,500 today but you will pay back $500 per year with your tax return for fifteen years. If you sell the home prior to that you must fully pay any amount remaining. However, if you do not have a profit when you sell any remaining amount owed will be forgiven.

So what’s the big deal? Well, for starters, the credit does make it easier for someone to buy a home by giving them additional money when they probably need it most. An interest-free loan is much better than adding that amount to a mortgage. A $7,500 mortgage for fifteen years at 6% would result in interest payments of $3,892, that is the true value of the credit.

Is It Worth It?

The real intent of the program is to make it easier for a first-time buyer to own a home. Encouraging home ownership is a way to help the troubled housing market to recover. If used correctly, the program can be a great benefit that allows someone who would otherwise be a renter to own a home of their own.  Of course, you should consult with a tax professional to see how it would apply in your situation.

Governments tend not to solve problems, only to rearrange them. – Ronald Reagan

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