Home-buyer Tax Credit
Buy a home and you get a tax break! As part of the Housing and Economic Recovery Act of 2008, a First time
Home buyer Tax Credit is now available. But this special tax break ends in mid‐2009. A home buyer
tax credit has been available for first‐time home buyers in Washington, D.C. for many years, and now
first‐time home buyers nationwide can take advantage of a similar benefit. In this brochure we’ll discuss
some of the provisions of the credit and explain how to use it.
Am I Eligible?
First‐time home buyers who purchase a principle residence on April 9, 2008 and before July 1, 2009 are
eligible. If you (and your spouse, if married) have not owned your principle residence for a 3‐year period
before your purchase, and you have never taken advantage of the DC first‐time home buyer credit, you
qualify as a first‐time home buyer.
How does it work?
Like all tax credits, it will directly reduce the total amount of taxes you owe. When you file your taxes,
for the year you purchased your home (2008 or 2009), you will be able to subtract the amount of the
credit from your Federal income tax liability, increasing the size of your refund or reducing the amount
you owe. For example, you file your ‘normal’ tax return and find that you owe $2,000 in taxes. With
this credit, your tax liability could be lowered by $7,500—which means, you instead get a $5,500 tax
REFUND check from IRS.
How big is the tax credit?
The tax credit is equal to 10% of the purchase price of your home up to $7,500. The full credit is
available for single individuals whose adjusted gross income is less than $75,000. If your adjusted gross
income is greater than $75,000 and your home purchase qualifies you for the full credit, the credit
phases out according to the dollar amount (or percentage if less than $7,500) in the chart below.
For married couples filing jointly, the credit begins to phase out at an adjusted gross income of$150,000. The dollar amounts in the chart below correspond to a phase out of the full tax credit (percentages are for credits less than $7,500).
What about Repayment?
The tax credit is not completely free money for you to keep. It has a payback provision that makes it
similar to an interest free loan. Two years after the credit is claimed, you must begin repayment so that
you will have paid the credit back in full over the course of 15 years. For those qualifying for the full
credit, the payback amount is $500 per year. For those getting less than the full credit, you pay equally
over the 15 years (which is a rate of 6.67% per year). If a qualifying home is resold before the credit is
repaid, the seller will have to immediately pay the outstanding balance of the credit. If the home is sold
at a loss, then you owe nothing back.
What’s valuable about a credit you have to repay?
Money today is worth more than an equal amount of money in future, which economists call the time value
of money. First, money loses its purchasing power over time due to inflation. Second, you can
use the money today to earn interest and repay the principal later—all the while keeping the interest for
yourself. For this reason, multimillion‐dollar lottery winners prefer taking a lower lump‐sum amount
than the multimillion dollar amount spread out over many years.
Let’s see some more numbers
Example 1: You buy a $200,000 home and get the full $7,500 tax credit. You hold onto the home for six
years and sell it for $250,0001. From 2010, you repay $500 each year and then repay the remaining total
balance of $5,500 in 2014. Applying a reasonable discount rate on money2, the chart below shows that
you benefited $2,122 from buying a home in 2008 even after the full repayment of the tax credit.
|
House held for 6 years; credit repaid in full |
||
|
Repayments |
Nominal Value |
Value in 2008 dollars |
|
2010 |
$ 500 |
$ 441 |
|
2011 |
$ 500 |
$ 414 |
|
2012 |
$ 500 |
$ 389 |
|
2013 |
$ 500 |
$ 365 |
|
2014 |
$ 5,500 |
$ 3,769 |
|
Total |
$ 7,500 |
$ 5,378 |
|
Tax Benefit after Full Repayment |
$ 2,122 |
|
1 That’s equivalent to price growth of 3.8 percent per year in that time period—somewhat below the historic
average.
2 A discount rate of 6.5% was used for these examples.
Example 2: You buy a $200,000 home and get the full $7,500 tax credit. You hold onto the home for
more than 17 years. In this case, you pay back $500 each year for 15 years. In this case you benefited
$3,086 from buying a home in 2008.
House held for 17 years; credit repaid in full
Repayments Nominal Value Value in 2008 dollars
2010 $ 500 $ 441
2011 $ 500 $ 414
2012 $ 500 $ 389
2013 $ 500 $ 365
2014 $ 500 $ 343
2015 $ 500 $ 322
2016 $ 500 $ 302
2017 $ 500 $ 284
2018 $ 500 $ 266
2019 $ 500 $ 250
2020 $ 500 $ 235
2021 $ 500 $ 221
2022 $ 500 $ 207
2023 $ 500 $ 194
2024 $ 500 $ 183
Total $ 7,500 $ 4,414
Tax Benefit after Full Repayment $ 3,086
Example 3: You buy a $200,000 home and get the full $7,500 tax credit. You hold onto the home for
two years and sell it for $190,000. In most cases, you do not have to repay the $7,500. The enacted law
insulates buyers from some of the risk of falling home prices.
Are there other conditions I should know about?
• You cannot claim both the DC and the national First‐time Home buyer tax credit.
• Purchases by non‐resident aliens and purchases financed by proceeds from a qualified mortgage
issue are not eligible.
• Any single family residence located in the United States that will be used as a principal residence
is eligible. Generally, this is the place where an individual spends most of his/her time. This
• includes single‐family detached housing, condos or coops, townhouses or any similar type of
new or existing dwelling.
• The credit will not result in an individual owing additional federal taxes under the Alternative
Minimum Tax.
• Home purchases between relatives and other gifts of residences are not eligible for the credit.
• Other tax benefits of homeownership are still in place. Mortgage interest deduction, capital
gains tax exclusion, and property tax deduction are some well‐known examples.
For more specific questions about the tax implications of the credit, please consult a tax professional.
Buying a first home is a big step!
Buying a first home is a big step. Fortunately, trained professionals like your Realtor® are willing and
able to help you through the process. In addition to the many benefits of homeownership, the
home buyer tax credit and more affordable prices make now an especially opportune time to purchase.
Still, the commitment is a substantial one, and the National Association of Realtors® encourages you to
ask questions and be informed about the decision you are making so that the home you buy is a home
you can enjoy for years to come.
If you would like to get consultation on home buying, view homes,bank owned foreclosures (REO) or short sales, please visit our website at: County Properties Real Estate.