Buying your first home just got easier thanks to a $7,500 tax credit offered under the recently signed Housing and Economic Recovery Act of 2008.
Buried inside hundreds of pages of legislation created to help the slumping mortgage and building industries, Congress included a provision that could cut up to $7,500 from your tax bill if you buy or build your first home, condo, or townhouse before July 1, 2009.
(Technically, it doesn't really have to be your first home. If you've been renting for more than three years, you may qualify! Consult your tax adviser.)However, there are some important caveats to this deal:
The first-time home buyer credit is essentially a zero-interest loan, says Paul Lopez, spokesman for the National Association of Home Builders, a Washington, D.C.-based association of 235,000 housing and building industry members. "You still have to pay it back," he says.
For example, if you claim a $7,500 tax credit as a first-time home buyer, you could pay back $500 a year for the next 15 years without any interest charge. In addition, you can wait up to two years after taking the credit before you begin repaying the government.
Is it worth the trouble? Absolutely! If you had to borrow $7,500 for 15 years, assuming a 7 percent annual percentage rate, you would pay more than $4,500 in interest alone. If you borrowed that amount for 30 years, you would rack up more than $10,000 in interest payments. That's enough to install an automatic sprinkler system around your home, with money left over for a new lawnmower.Unlike a tax deduction, a tax credit is a straight reduction in taxes you are required to pay. So, if you owe $7,500 in taxes, the first-time home buyer's tax credit would reduce your tax liability to zero.
But what if you don't earn enough in 2008 or 2009 to pay $7,500 in taxes? Will the tax credit help?
Yes, because Congress made the tax credit refundable, says Lopez at the NAHB. "Refundable" is tax jargon for, "the government may owe you money."
For example, if you owe $3,000 in taxes next April, but you qualified for the $7,500 first-time home buyer credit, the credit would cover your tax liability and Uncle Sam would send you a check for the remaining $4,500. That's interest-free money you could use to improve your home, pay a bill, or invest in a high-yielding STCU certificate.
The tax credit is available when you file your 2008 or 2009 tax return. However, if you are sure that you will qualify for the credit, you could adjust your current payroll tax withholdings or estimated tax payments right now to account for your anticipated lower tax bill. In addition, if you buy a house in 2009 after filing the 2008 tax return, you can always file an amendment to the 2008 tax return and claim the credit earlier.
First, it was low mortgage rates. Then came a slump in housing prices. Now a $7,500 tax credit from the government. Now is a great time to buy your first home!
Here are three ways to get started buying or building your first home:
