Understanding the Tax Credit for First-Time Home Buyers

I recently helped my sister as she went through the process of buying her first home. She was able to take advantage of a tax credit offered to first-time homebuyers by the federal government. On a house that cost $140,000, she got a $7,500 tax credit, which greatly helped her financially as a new homebuyer. Unfortunately, this program was not available when I purchased my first home in 2002.

The tax credit for first-time homebuyers applies to all homes purchased between April 8, 2008 and July 1, 2009. According to the Internal Revenue Service (IRS), this credit reduces a taxpayer's tax bill or increases their tax refund, dollar for dollar. The credit is also fully refundable. This means that the credit will be paid to eligible home buyers, even if they don't owe any tax, or the credit is more than the amount of tax that they owe.

One thing to be aware of is that this tax credit is not free money - the amount of the tax credit must be paid back in equal yearly installments over the next 15 years. The government basically extends this credit to first-time homebuyers as an interest-free loan. According to information located at www.irs.gov, "The credit is 10% of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more."

There are some restrictions that home buyers must be aware of. This credit is only available to individuals who are purchasing their first home. The home purchase must be of a main residence, vacation homes or rental properties are not eligible for the credit. Also, a first-time home buyer is defined by the IRS as someone who has not owned a home at any time in the past three years. If you owned a home prior to that, you can qualify as a first-time buyer for purposes of taking advantage of this tax credit. The credit is also reduced for higher income buyers. If you are married and filed jointly, you are ineligible for the credit if your yearly income exceeds $170,000. If you file singly, your income cannot exceed $95,000.

You should also keep in mind that if you sell the home, or stop using the home as your primary residence, the tax credit will be due immediately upon the sale of the home. If you transfer the home to a spouse as part of a divorce or other legal proceeding, your spouse will be responsible for repaying the yearly installments. However, if you should die before the tax credit is repaid, the unpaid amount is forgiven by the government if you are single. If you are married, your spouse is responsible for repaying the final installments of the credit repayment.

This tax credit is a great deal for new homebuyers. This can ease your tax burden in these uncertain economic times, and allow you to save on your yearly taxes for the first year that you own your home.

Some information for this article was obtained from the following sources:

"Federal Tax Credit to Aid First-Time Home Buyers," National Association of Home Builders.

"Tax Credit to Aid First-Time Home Buyers," Internal Revenue Service.