Those reading here over the past week know we’ve been obsessing over the about-to-become-law tax credit for first time home buyers. Several iterations were bantered about Congress before the dust finally settled.
Yesterday both the House and Senate passed the stimulus package (officially now called the “American Recovery and Reinvestment Act of 2009”) that included revisions to an existing first time home buyers tax credit. Courtesy of the National Association of Realtors (NAR), here is a nice breakdown comparing the two. The stimulus bill is expected to be signed into law by the President early next week.
FIRST-TIME HOMEBUYER TAX CREDIT
As Modified in the American Recovery and Reinvestment Act
Major Modifications Bolded
February 2009
| FEATURE | CREDIT AS CREATED JULY 2008 APPLIES TO ALL QUALIFIED PURCHASES ON OR AFTER APRIL 9, 2008 | REVISED CREDIT – EFFECTIVE FOR PURCHASES ON OR AFTER JANUARY 1, 2009 AND BEFORE DECEMBER 1, 2009 |
| Amount of Credit | Lesser of 10 percent of cost of home or $7500 | Maximum credit amount increased to $8000 |
| Eligible Property | Any single family residence (including condos, co-ops, townhouses) that will be used as a principal residence. | No change |
| Refundable | Yes. Reduces (or can eliminate) income tax liability for the year of purchase. Any unused amount of tax credit refunded to purchaser. | No change |
| Income Limit | Yes. Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return). Phases out above those caps ($95,000 and $170,000). | No change |
| First-time Homebuyer Only | Yes. Purchaser (and purchaser’s spouse) may not have owned a principal residence in 3 years previous to purchase. | No change |
| Revenue Bond Financing | No credit allowed if home financed with state/local bond funding. | Purchasers who utilize revenue bond financing can use credit. |
| Repayment | Yes. Portion (6.67% of credit or $500) to be repaid each year for 15 years, starting with 2010 tax filing. | No repayment for purchases on or after January 1, 2009 and before December 1, 2009 |
| Recapture | If home sold before 15-year repayment period ends, then outstanding balance of repayment amount recaptured on sale. | If home is sold within three years of purchase, entire amount of credit is recaptured on sale. Applies only to homes purchased in 2009. |
| Termination | July 1, 2009 | December 1, 2009 |
| Effective Date | Purchases on or after April 9, 2008 and before January 1, 2009. Repayment to begin for 2010 tax year. | All revisions are effective as of January 1, 2009 |
You can download a PDF version of this home buyer tax credit comparison here.
There were a few other measures in the bill that could impact the housing market, most notably the reinstatement of higher FHA, Freddie Mac and Fannie Mae loans for 2009 (which look like they will be $356,250 for FHA and $417,000 for Fannie and Freddie in Maricopa and Pinal counties). There is also a tax credit for homeowners for purchases of qualified new furnaces, windows and insulation. More on this as it becomes available.
Will this revised tax credit stimulate a housing market recovery? Maybe. Maybe not. Personally, I think the Senate’s version which was a $15,000 tax credit (that could be evenly split over two years), wasn’t subject to income restrictions and most importantly was for ALL, not just first-time, buyers would have been more successful. But that’s water under the bridge. It’s gone. What we have is what we have. This is a nice incentive for first-time buyers, and the fact that it is both refundable and does not have to be repaid is a significant improvement over the existing “credit” (which was really a zero interest loan).
I think it will help, but it’s certainly not a cure for the beleaguered real estate market.
Of Note: I am not a tax professional, nor do I play one on TV or the Internet. You should seek advice from a CPA or professional tax preparer. If the IRS comes after you with guns blazing for anything you read in this post or anything you think you read in this post, it’s not my fault. Seek professional help!
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Any idea as to whether or not this can be claimed on the 2008 tax return? The way I read the bill it appears that purchases can be treated as made on 12/31/2008 even if the actual purchase was made in 2009. Please let me know if I am reading this correctly. Thanks!
Andy – that’s the way I read it too (that it can be claimed on 2008 return). But I’m not a tax professional and I’d consult with one first.
I’m irritated (as a potential 2009 buyer) that the govt. dangled the proverbial $15k carrot under my nose! Granted I have to sell one of my homes before I can put a contract on the dream home Francy showed us last weekend…
Fun fact from the “stimulus” bill getting press – they’ve “earmarked” $$ for a high speed rail from Anaheim to Vegas – some $33B – that’s BILLION. Reid really wants to take care of his constituency there I guess. I can just see the advertising now – “Ride for 86 minutes and no one will even know what you did in Vegas, let alone letting it stay in Vegas”. Ok so I’m not an advertising guru…you get the point.
Thanks for the response Jay. For those who are curious about what they would get back under this credit, check out IRS form 5405 (www.irs.gov), it is the current form used for the $7500 tax credit. I am assuming that the same calculation would be used for the $8000 tax credit. It is helpful especially for those of us who are over the income limits.
Here is an example using that calculation method for filing single ($75000 – $95000 income limit):
Adjusted gross income = $77500
$77500 – $75000 = $2500
$2500 / $20000 = 0.125
0.125 x $8000 = $1000
$8000 – $1000 = $7000 (the final credit amount)
Hey Jay, thanks for the information. Does anyone know how this is going to have to be filled out on a tax return? Will it be as simple as, lets say, checking a box “I bought my first home this year” or will it involve many complex forms? It seems to me that if it is the later, some people who this is targeted for, such as young people who do not have a lot of experience with filling out tax forms, might miss out on the incentive just from not knowing what to do. Just my $0.02.
**Atlantanomics´s last blog post..What do I think?
I’ve got people sitting on the fence about buying now and the tax credit did nothing to get any of them moving. My biggest fear is a return to a Carter-era interest rate run-up when we need to pay for this pork package.
You know, I wonder if the best thing for the economy would be to simply leave it alone and let nature take its course. Has a big spending bill ever invigorated a languishing economy? There’s disagreement over Roosevelt’s New Deal, but I think a lot of economists would say the War boosted the economy in that instance, and not any government plan.
I also don’t side with Republicans, though, who think tax cuts are the holy grail. I can’t imagine having a $1,000 tax credit — or even an $8,000 one — is going to encourage me to run out and buy a flat-screen TV.
I hate to sound cynical, but I believe that the best thing government ever does is nothing. That’s what I’d like them to do in this situation.
Nice summary of this program. I noticed that there are some people that think the 15,000 credit will get proposed again. It may not be completely dead. I think you are right about this program being a better stimulus. Right now in the Ann Arbor marked, first time buyers really are facing a great opportunity and the tax credit makes it even better. But, the 15k credit could loosen up a lot of move up or move down buyers too – this needs to happen to get the inventory up and the market balanced
I held an open house this afternoon on a $300K home. I had two 1st time buyer couples stop by. One was aware of the $8K credit. The other couple wasn’t but became excited when we discussed it. I told them to talk to their accountant, but depending on their financials, they might be able to lower their withholding, giving them more spending money during the rest of the year.
I was leery of the bill being enough to do any good, but after seeing these couples’ reactions, I’m a little more encouraged now.
**Elaine Reese´s last blog post..Congress – Stimulus Bill – Doxies. What do they have in common?
Does this incentive have the requirement for 5% down as one of the proposals for the bill mentioned a while ago? I’m looking at buying with a 3.5% down (FHA) and I need to look for a less expensive house then. Also, any links for the wording of the bill as it relates to the home buyer incentive?
Thanks, Dave
I honestly do not think this new bill is going to stimulate much at all. It is too bad that so much money is being wasted and the tax payers are not getting much in return for it.
There is one simple thing these politicians could do to stop the real estate free fall, stabilize the market and also stimulate the economy.
Get rid of the capitol gains tax (for any one that bought real estate in the next 18 months if not for ever).
A lot of investors have their money liquid because of the stock market. They would quickly start buying up real estate knowing they would not have to pay capitol gains tax when they eventually sold the property. That would definitely stabilize the real estate market. It would also bring jobs back to all the real estate industry plus all the following:
Contractors and all their suppliers including appliances, paint, landscapers and all building supply companies.
I guess that would be too simple and not be helping lobbyist that put them into power.
Dave – There doesn’t appear to be any down payment requirements in the bill. There was an amendment proposed last week to make a 5% down required, but it never made it into the final bill.
I’ve got link to the bill in this post:
http://www.phoenixrealestateguy.com/house-passes-stimulus-bill-all-1091-pages-of-it/1919
Be warned, it’s almost 1100 pages and you will want to poke a stick in your eye at about page 3.
The home buyer tax credit portion is in Part 2.
At least there’s hope in this still “blurred” economy. The stimulus bill with its new name somehow foretell that the future is still very bright if only cooperation is in the forefront. I know the IRS are not that low-minded persons to “grab” anybody that may “get their way”. We need understanding and sympathy to achieve what everyone is aiming for.
Jay,
Your chart is well prepared and easy to understand – a great quick reference. Acknowledging that we are not CPAs, I would recommend one change.
With regards to the recapture provision, there was (and apparently still is?) forgiveness of the recapture amount that exceeds any net profit on the sale of the subject property.
For example, Joe & Helen buy their first home for $150,000. They sell it 2 years later for $160,000 but only netting them around $150,000 after their share of closing costs, commissions, etc. Since recapture does not start until the second year after the claim, they would not yet have begun repayment. But, since they had a net $0 profit, their repayment is forgiven.
I bring this up because many first-time home buyers are nervous and have expressed fear at coming up with this amount if they should have to sell early. Other forgiveness provisions are built in (death of spouse, etc.) as are other accelerators of the recapture, but I believe this example is worthy of note.
Thanks.
**Tim Epps´s last blog post..WSJ – For Some, It’s Finally Time to Dive Into Housing Market
I think the Senate took a big swing by going for the $15,000 tax credit and open to anybody. Sometimes you have to ask for the world to get what you want. I think there is little doubt that this will help encourage first time home buyers. I am just hoping that those sales trickle upward into the move-up home market.
**Ryan´s last blog post..Scotty Browns in Bellingham WA – 3101 Newmarket Street Suite 201
After reading all sorts of commentary on this incentive, I’m struck that we might just be exchanging one form of market-distorting conditions that drove up home prices in the first price (easy credit, non-due diligence by lenders) for another (government payments to help abate the drop in home values). It just seems it will only delay the inevitable continued downward spiral in prices.
As Usual Jay, great information. This might be the only thing that help the rule followers.
I shouldn’t complain, I suppose, as I was buying my house last summer way before I knew about any “credit.” I found out about it like three days before closing. I took it, and I’m glad I did. It’s quite simple, you just have to list your parcel number, what you bought it for, all of that’s public information found on your city’s website. But I’m a little pissed that if I had waited six months, it would be $500 more, and I wouldn’t have to pay it back. $8,000 landing in my lap, no strings attached. That’s a third of my annual pay!
How does that make any sense? Do you think they might retroactively change the 2008 stimulus measure to align more with the 2009 one? *sigh*
LeAnna – I haven’t heard of any considerations for making the new $8,000 retroactive. The effective date is Jan 1, 2009. Imagine how those that bought on December 31 feel, or the people that bought in April 2008 before the $7500 loan was available — they get nothing. I guess they have to draw the line somewhere, and there will be people on the wrong side of that line no matter where it’s drawn.
Getting a fairly large tax credit (for most people) can do nothing but help. Personally I have a friend who is going to claim the credit on his 2008 return and use the money on new flooring and furnishing for his house…which is probably what they hoped for when they put it in the bill.
I am going to contact two of my rent to own families. Find out if they are familiar with this program to assist them with their down payment.
They just rolled out a similar program here in Canada. I hope that this will get people buying again. We have been having a ton of showings but we haven’t been getting anything on paper. With today’s low interest rates and this incentive people should start buying right away. At least we can hope this helps.
Great post! Really informative.
Thanks,
Dale Corbett
Frisco Homes
The tax credit is for first time home buyers only. DON’T RULE YOURSELF OUT if you have previously owned a home. The law defines a first time buyer as one who has not owned a principal residence in the previous 3 years-a rental home or vacation home will not exclude you from this tax credit.
Regards, Shane, Guy into real estate in panama
Very detail information. Thanks.
I didn’t realize this was 10% of purchase price. If I wholesale a house for $50,000 then the first time homebuyer is eligible for $5K of the stimulus.
Seems that you have done a great gob here to let people be aware of this first-time homebuyer tax credit. It is very detailed but needs to be revised cause people could be misdirected.
Toronto – what do feel needs to be revised? This post contains all the current info on the first time homebuyer tax credit. If I’ve missed something, please let me know as the last thing I want to do is misdirect anyone.
It seems that despite the bailout, only the banks are the beneficiaries and not the people.
There’s only a difference of $500 from $7500 to $8000 and it’s hardly significant.
So if I have a cosigner on the home and the cosigner has owned a home. Does that rule me out for the tax credit? I have not owned a home before.
Myles,
As long as this is your primary residence and the cosignor is on the note only and not on title, you should be able to receive the credit. If the cosignor is a spouse, you will not if they have owned a home in the last 3 years. This credit is not related to how you finance the purchase – only to the manner in which title is held.
Of course, with any tax related question, please consult your tax advisor. Some sample scenarios are also on the IRS website at http://www.irs.gov/newsroom/article/0,,id=206294,00.html . Your situation may be very close to scenario S2.
Good luck with your purchase!
Tim
**Tim Epps´s last blog post..$8000 First Time Home Buyer Tax Credit for FHA Down Payment? NO (and maybe)
The home buyer credit is nice, and i know people personally who only is buying a home because the program exist. Between this and that cash for clunkers program, there should be alot of spending going on…lol.
The tax payer money need to be spent on the well being of common American and should not be wasted to bail out the institutions responsible for the present economic crisis. I hope that the bill will help to protect the interest of a common American.
Many realtors and business establishment were engaged in financial issues, they tend to get big loans in order for their business to survive in this time of depression.
Many realtors and business establishment were engaged in financial issues, they tend to get big loans in order for their business to survive in this time of depression.
Many realtors and business establishment were engaged in financial issues, they tend to get big loans in order for their business to survive in this time of depression.
i guess this is better late than never, but……
If I bought a house in October ‘08 and now can sell the house for more than we bought it for, does the government (read IRS) allow commissions, concessions to be paid out before the government recaptures any of the money ($7,500) we borrowed? Or does the government recapture the $7,500 first?
Mark – I’d be stepping WAY out of my area of expertise if I answered this question. I’ve never read about the IRS allowing for commissions / closing costs to be taken off the top before calculating re-capture, but your question wold be best proposed to a tax professional.