first time home buyer – owner loan

Lee Keadle asked:


Many buyers have been asking about the tax credit for home buyers coming up this tax year.  Although this topic has gotten a lot of coverage in the news, people have gotten really confused about what it is.  So, I wanted to clarify some of the misconceptions I’ve noticed when talking to home buyers. 

The biggest misunderstanding about this tax credit is that every home buyer does not get it.  This credit is only for first time home buyers.  But, the good news is that the government usually defines people who haven’t owned a home in 3 years as first time buyers.  So, you may not technically have to be buying your first home in order to qualify for this incentive.

Another misconception with this tax credit is that buyers think this credit is free money.  Now, everyone knows there is no such thing as free money.  The rule that “if it sounds too good to be true, it probably is” applies here.  It’s important to note that this is actually a loan from the government to help first time buyers pay their taxes (since it’s assumed that this person will have incurred a lot of extra expenses in buying the home this past year).  This tax credit is simply an incentive to help more people be able to buy these homes that are sitting on the market.

The way that it works is that this $7500 tax credit is repaid with your taxes every year at $500 a year.  So, again, you will be paying this money back, but it will just be over a period of several years (similar to the loan on your home).  But, unlike your home loan, this tax credit is an interest free loan.  So, you’ll only be paying back that $7500. 

When people realize they’re only postponing paying the inevitable tax money, they often ask if it’s really worth doing.  After all, why not just pay it and get it over with?  The answer depends on whether you need that money now to use for improvements to the house – such as putting carpet down, painting, or getting plumbing or electrical work done.  If you’ve bought a house that is going to require some work early on, this tax credit may be worth it. 

There have also been a lot of questions about the time frame the buyer purchased in order to qualify.  We’ll be filing taxes in 2009 for the tax year of 2008.  So, if you bought the home in 2008, you have the option to use this tax credit. 

The last point I’ll mention is that this tax credit does not have anything to do with property taxes.  Instead, it’s figured in with your income tax – which is confusing.  For example, let’s say you file your 2008 returns and have a tax liability of $15,000 that your company withholds in wages.  You would use your $7500 tax credit and pay only $7500 in your income tax.  Or, if your company withheld $7500, you would use your tax credit of $7500 and would break even.  In this last scenario, you would actually pay nothing this year in income taxes.

Be sure to talk to your CPA (or the person who does your tax work) about this tax credit if you think you may be eligible.  Although there is a lot of information about this tax credit on the internet, it’s still important to get professional advice about taxes when filing tax returns.  And, he or she should be able to answer any questions you have and give you an estimate as to how the credit will affect your income taxes this year.



Jimmy