I understand that the federal government recently passed legislation which will give a tax credit to a first-time home buyer. How does this work?
The tax credit is available for first-time home buyers only. The maximum amount of the credit is $7,500. The credit is only available for homes purchased on or after April 9, 2008 and before July 1, 2009. The term "purchased" means the date of the closing of the purchase. Single taxpayers with incomes of up to $75,000 and married couples with incomes of up to $150,000 qualify for the full tax credit. The tax credit works like an interest free loan and must be repaid over a 15 year period.
The tax credit is available for existing homes or new homes provided that the home is the principal residence of the taxpayer. It even applies if you have hired a contractor to construct a home on a lot that you already own. The tax credit is refundable. What a tax credit means is that you get to offset on your obligation, due for your federal income taxes, the amount of the credit up to $7,500. Even if your tax obligation, however, does not reach that amount, you can still get the credit. Typically, the government will send you a check for a portion or even all of the amount of the tax credit.
The tax credit must be repaid without interest over 15 years or when the home is sold if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit $500 per year. The home owner does not have to begin making repayments on the tax credit until two years after the credit is claimed. So, if the credit is claimed on a 2008 tax return, the $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining tax credit amount would be due from the profit from the sale of the home. If there was insufficient profit, the remaining credit payback would be forgiven.
If you have questions about this or any other real estate matter, please contact Tom Bennett at (617) 531-6574 or tvb@barronstad.com.