Tax Credit For Home Buyers Works Like An Interest-Free Loan

Anyone who’s been sitting on the sidelines hesitant to jump into the housing market until conditions settle down should know these dates: April 9, 2008, through June 30, 2009.

They mark the eligibility period for the home purchase tax credit created by the housing bill enacted last week. If you have not owned a house during the last three years — or are considering buying a first home — and you close on a purchase before the end of next June, you may be eligible for a credit of as much as $7,500 against your federal taxes for 2008 or 2009 ($3,750 if you file taxes as a single person).

The new tax credit is expected to benefit hundreds of thousands of buyers. Here’s an overview of the specifics.

* The basic idea: To jump-start housing sales and clear out stocks of unsold real estate, Congress is offering tax credits to encourage new purchasers. Buy any house — new, old, in any location or condition for any price — within the designated time period and the IRS will cut as much as $7,500 off your tax bill this year or next.

For example, if you’re an eligible buyer of a home 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.

* Eligibility rules: If you own a home now, you’re not eligible. If you sold your home more than three years ago and now rent, you are eligible. The same is true if you’ve never owned a home. Close on a house before next June 30 and you can claim a credit of up to 10% of the purchase price to a maximum of $7,500.

If your adjusted gross income exceeds $150,000 ($75,000 for singles), the credit maximum begins to phase down. You cannot claim the credit if you 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.

* Payback: Unlike some past tax credits, this one must be repaid over an extended period. 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 repay the remainder of the credit 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 works very much like an interest-free loan. You pay the principal back in increments over time, but there’s no interest charge to you.

Rob Dietz, an economist for the National Assn. of Home Builders, says the 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 go out and purchase replacement homes for themselves — extending the effect of the credit into the move-up segment.

How do you claim the credit? If you qualify, you simply request the credit on your tax return for either 2008 or 2009, which will be modified for that purpose.

Even if you purchase in 2009, you can take the credit against your 2008 taxes by filing an amended return. The home builders group is launching an educational website, at www.federalhousingtaxcredit.com, with additional information for consumers.