New First Time Homebuyer Tax Credit Explained

A first time homebuyer in this context means that a main home was not owned in the three years prior to date of purchase. A main home for tax purposes is a primary residence and does not include vacation or rental property.

If the first time homebuyer requirement is met, the credit applies to the purchase of a main home described above made between 4/8/2008 and 7/1/2009 from any taxpayer other than a close relative (spouse, parent, or grandparent). If the purchase also qualifies, then the credit can be applied to either the 2008 or 2009 tax year.

The credit is worth 10% of the purchase price of the home with a maximum value of $7500 for single or married filing jointly or 5% each with a maximum of $3750 each if married filing separately. As a credit this will reduce the homebuyer's taxes owed or increase the refund by the entire credit value calculated above. Any surplus will be paid out as a refund if the credit is greater than the amount of taxes owed or no taxes are owed at all.

The first time homebuyer tax credit must be repaid to the IRS over a 15 year period without interest, acting as an interest free loan to a new homeowner. The repayment process will take place in 15 equal annual payments starting in the second tax year after the credit was first claimed. If the credit is claimed on the 2009 return, then the first repayment would be made on the 2011 return and continue to be made on each return until 2025.

An excellent use for this credit would be to apply the entire value of the credit to pay down the mortgage and apply the payment savings over time to pay back the tax credit. This will save on mortgage interest paid and the homeowner can pocket the difference since no interest will be owed to the IRS, only the original amount of the credit. Even though the credit must be paid back it is still a great value as the amount of the credit today will be worth more than the amount you pay back to the IRS over time thanks to inflation.

There is an income limit for the first time homebuyer tax credit. The limit is based on the modified adjust gross income (MAGI) and phases out between $150,000 and $170,000 for married filing jointly and between $75,000 and $95,000 for single or married filing separately. Any taxpayer with income above the high end of the range will not qualify at all.

If the home is sold before the end of the first year the purchase will not qualify for a credit. In addition, if the home is sold at any time before the credit has been fully repaid or it is converted to a rental or vacation property, then the remaining amount of the credit will be due on the tax return for the year in which the sale or conversion occurred. The repayment amount is limited to amount of gain on the sale, assuming the sale is not to a relative. A loss on the sale could mean the reduction or elimination of remaining payments to the IRS for the original tax credit.