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Congress May Make $7,500 Home Buyer Tax Credit More Attractive

But there’s a good chance that they could be relieved of the repayment requirement.

Should you give the $7,500 home buyer tax credit a second look? Now that Congress may be on the verge of transforming it into a true tax credit — one that never has to be paid back — you just might want to do so.

On Jan. 15, the House Democratic leadership outlined its $825-billion economic-stimulus package, loaded with $275 billion in tax cuts and $550 billion in new spending on healthcare, education, alternative energy and infrastructure improvements.

Tucked away in the tax section was a significant improvement to last July’s congressional effort to stimulate home sales. That program offered a credit of as much as $7,500 to buyers who had never bought a house or hadn’t owned one during the previous three years. To qualify, taxpayers would need to complete a home purchase between April 8, 2008, and July 1, 2009.

But relatively few consumers were attracted to the plan because unlike virtually all other federal tax credits, this one had to be repaid in full to the Internal Revenue Service over a 15-year period. The $7,500 was more like an interest-free installment loan from the government than a straightforward reduction on buyers’ tax bills.

Although final details on a revised credit are still subject to negotiations between the House and Senate — and to passage of the economic-stimulus package itself — there’s a good chance that buyers who sought the credit in 2008, and new purchasers in 2009, will be relieved of the repayment requirement.

According to industry estimates, removing the repayment rule could lead to an additional 202,000 purchases this year. The National Assn. of Realtors is pushing for the July 1 deadline to be extended to Dec. 31, opening the door to even more sales.

Meanwhile, the IRS has come out with two recent advisories on the credit, plus a new Form 5405 for taxpayers interested in claiming the $7,500 benefit, either for 2008 or 2009. You can download a copy of the form at in the publications and forms section.

Based on the latest IRS guidance, here’s what you need to know if you’re thinking about buying a house this year — taking advantage not only of lower prices and record low mortgage rates, but a temporary tax credit that may well turn out to be nonrepayable:

* The $7,500 is available to singles, married couples filing jointly and unmarried co-purchasers, provided they meet the nonownership test for the previous three years. Married couples filing singly can claim as much as $3,750 each. Unmarried individuals can allocate the credit on their filings according to their respective ownership shares or capital investments in the house.

* Only principal residences — or in the IRS’ words, “the one you live in most of the time” — are eligible. No second homes, investment properties or houses outside the U.S. pass the test. But the definition of “home” extends far beyond conventional houses sited on lots. It “can be a . . . houseboat, housetrailer, cooperative apartment, condominium or other type of residence,” according to Form 5405.

* Even if it’s your first home purchase, you are not eligible if your adjusted gross income is more than $95,000 (single filer) or $170,000 (married joint filers). Married couples with incomes between $150,000 and $170,000 are eligible for reduced credits, based on a phase-out schedule. Single filers with incomes between $75,000 and $95,000 also are subject to reduced credit limits. District of Columbia residents who are eligible for the city’s first-time home buyer credit are barred from use of the federal tax credit. Taxpayers who use tax-exempt mortgage bonds issued by state or local governments to finance home purchases also are ineligible.

* You can’t claim the $7,500 credit if you buy your house from a “related person,” meaning a spouse, parents, grandparents, children or a corporation or partnership in which you own more than 50% of the stock or capital interests.

If you pass all these tests, and get the purchase done by the deadline date Congress decides as part of the final stimulus package, you should be able to take $7,500 off your federal tax bottom line and not worry about paying it back.