FHA Loan Houston Blog

Anyone who has been hesitant about jumping into real estate until conditions settle down should keep in mind these dates: April 9, 2008, through June 30, 2009.

They mark the eligibility time span for the home-purchase tax credit created by the new housing bill. If you have not owned a house during the past three years and can go to closing before the end of next June, you may be eligible for up to a $7,500 credit against your federal taxes for 2008 or 2009 ($3,750 if you file taxes as a single person).

The new credit is expected to benefit hundreds of thousands of buyers. The specifics of the credit changed in the past month as the Senate and House negotiated a final compromise, so here’s a quick overview of the credit in its final form:

• The basic idea: To jump-start housing sales and clear out unsold real estate inventories, Congress is offering tax credits to pull in new buyers. Within the designated time period, buy any house — new, old, any location or condition, any price range — and the IRS will cut up to $7,500 off your tax bill for either this year or next. For example, if you’re an eligible buyer this year and you owe the IRS $4,000 on your total 2008 income tax bill, your $7,500 tax credit could wipe out everything you owe plus get you a $3,500 refund. The new tax credit is what the government calls “refundable”: If your tax bill is less than the credit amount, you get the difference back from the Treasury.

• Eligibility rules: Do you own a home? If so, you’re not eligible for the credit. Did you sell your home more than three years ago and now rent? You are eligible. You’re also eligible if you have never owned a home. Close on a house before June 30, and you can claim a credit of up to 10 percent of the purchase price of the property, up to $7,500. If your adjusted gross income exceeds $150,000 ($75,000 if you’re single), the credit maximum begins to phase down. You cannot claim the credit if you are a nonresident alien, financed the property using a state or local housing agency’s tax-exempt bond mortgage, or do not plan to use the house as your principal residence. Buyers who use the District’s first-time-buyer credit program cannot double-dip and use the new federal credit, too.

• Payback: Unlike some other tax credits, this one requires beneficiaries to repay the credit. Starting in the second tax year after purchase and continuing for up to 15 years, taxpayers are expected to make pro rata repayments to the government on their federal filings. Over a 15-year payback period for the full $7,500 credit, the cost would be $500 a year. If you sell the house before the end of the repayment period and you have no gain on the sale, you won’t be expected to pay the credit back from the proceeds. If you have a net gain, the “recapture” cannot exceed the amount of your gain. In other words, the federal government is taking on all or much of the risk that the value of your new house won’t increase over time.

At its core, the new tax credit functions very much like an interest-free loan for up to $7,500. You pay only the principal back over time.

Rob Dietz, an economist for the National Association of Home Builders, said the new credit not only will pull first-time buyers into the market, but also will have a powerful “multiplier effect” as thousands of sellers of these credit-assisted houses buy replacement homes for themselves, thus extending the impact of the credit into the move-up segment.

How do you claim the credit? If you pass the eligibility tests, simply request the credit on your tax return for either 2008 or 2009. Even if you buy in 2009, you can take the credit against your 2008 taxes by filing an amended return. The association has launched an educational Web site, www.federalhousingtaxcredit.com, with additional information for consumers.

By Kenneth R. Harney