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homebuyer tax credit

Question: My husband and I just bought our first home in South Minneapolis this past fall. Since then, I have heard a lot of talk about the IRS Federal Tax Rebate for first time home buyers that is being offered this year. I know that we qualify for the full amount of the rebate ($7500) but I am concerned about the provision to pay it all back in the remaining lump sum in the event we sell in the future. Is there a way to take less than the full amount or is this interest free government loan just too good not to pass up in its entirety? Christine, Minneapolis, MN

Answer: Thanks for the question. I hadn't looked very closely at the $7500 tax credit for first-time homebuyers. You've forced me to look at it more closely and, as far as I can see, it's a better deal than I thought.

Like all tax law today, there are quite a few wrinkles. (The IRS has a lot of good information here.) Here are the highlights:

*It's really an interest free 15-year loan. You claim the credit on your federal income tax form. The tax credit is equal to 10% of the qualified home purchase price, and tops out at $7500.

*You don't have to start repaying the loan for the first two years of homeownership. After that, you send the government $500 a year. If you sell the house before you have repaid the loan you pay it from the gains. No gain? The loan is forgiven.

*To qualify you have to buy on or after April 9, 2008 and before July 1, 2009. (Keep those dates in mind!). The purchase date is defined as the closing day. A first-time homebuyer is defined as someone who hasn't owned a home for 3 years preceding the closing.

*The income limits on adjusted gross income is $75,000 and less for single filers and $150,000 for married joint filers. For income above that a partial credit is available. Anyone with an adjusted gross income of more then $95,000 for single filers and $170,000 for married filers doesn't qualify.

The standard rule of taxes applies here: If taking the credit improves your finances then take advantage of Uncle Sam's offer. And for most people I think the credit will be a good deal.

Additional thoughts, anyone?

Here is an update. It's from a look at President Barack Obama's economic recovery plan as it was reported out of the House Ways and Means Committee. The analysis is by CCH, a Wolters Kluwer business.

New Rules for First-time Homebuyer Credit

The proposed legislation modifies the first-time homebuyer credit that was signed into law last year, removing a requirement that the $7,500 credit be repaid over 15 years, but the waiver applies only to houses purchased in 2009 and before the expiration of the credit on July 1. On the other hand, those who take the credit will have to repay the entire amount if they sell their homes within three years of purchase.

Under current law, those who purchased homes between April 9 and December 31, 2008, can claim the credit on their 2008 return, but must repay it over 15 years, beginning with their tax return two years after purchase. If they sell the home, they must repay the entire credit, but only up to the amount of their gain on the sale.

"Frankly, the distinction between 2008 and 2009 purchases is puzzling," Luscombe said. "It seems strange for the people who bought a home in December 2008 to be treated so differently from those who do so in January, 2009, so I wouldn't be surprised if somewhere along the line someone will take a second look at this."

About the author

Chris Farrell is the economics editor of Marketplace Money.
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That's definitely one option on the table. But I wouldn't bank on anything yet. There's still a lot of negotiating going on, so it's unclear what will be the final decision. For instance, this is a recent CNN/Money report:

"The NAHB has been pushing for all home buyers to get a temporary tax credit for buying a primary residence worth up to 10% of the purchase price. A tax credit is a dollar-for-dollar reduction of one's tax liability.

Currently, only first-time buyers may get a temporary tax credit worth up to $7,500 for a limited period of time. But that credit functions more as an interest-free loan from Uncle Sam because the home buyer has to repay it over time.

Neither Dodd nor Senate Finance member Charles Schumer, D-N.Y., speaking to the press on Thursday, endorsed the idea of an actual tax credit. Dodd said a tax credit would not help prevent foreclosures but could spur economic growth.

And Schumer said there was "broad support" among members of the Senate Finance Committee to make tax policy changes to support housing, particularly existing homes as opposed to newly constructed ones."

I got the credit. Is there a way to check on the status? They said 6 to 8 weeks.

Is this tax credit refundable? That is, can you get cash back from the feds if the credit is more that the taxes you owe?
If it isin't refundable, can you carry the credit over to future tax years?

You say "for most people this credit will be a good deal". Can you explain when it would NOT be a good deal? For example, if your tax liability is less than $7500?

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