Real Estate

Tax Help for Homebuyers

Story Published on December 21, 2008 ⋅  Email this Story ⋅  Print this Story ⋅ Post a comment ⋅

Coming up with money to buy a first home is brutally tough. This is particularly true with the current market which is such a nightmare. Fortunately, the government is helping people in addition to the banks.

The housing market is a bottom up feeder system. Simply put, you buy a home, build some equity in it over time and then sell it. You use your gain to buy a bigger house and so on through life.

Take first time homebuyers out of the system and things get ugly quickly. The homeowners above this level suddenly have nobody to buy their homes. If they cannot sell, they are not buying and the entire market starts to fall apart.

A variety of factors have resulted in a tiny first time homebuyer market segment. This is killing the housing market, so the government has made an effort to get first time buyers back into the market.

The big carrot being dangled is a tax credit created as part of the Housing and Economic Recovery Act of 2008. It is a very big carrot, indeed. How big? Try a $7,500 tax credit for first time homebuyers.

A tax credit is a beautiful thing. Why? It is applied directly to the tax amount you owe after doing your taxes. If your accountant tells you a check for $3,000 is due to the government, a tax credit is deducted directly from this amount on a dollar for dollar basis.

Assume I can claim this first time buyer tax credit in the amount of $7,500. I determine I owe $2,500 to the IRS after doing my taxes. I would then apply my tax credit to this and send in a return telling the agency to send me $5,000.

It may see dangerous to ask the IRS for more than I actually owe. In general, it is a bad strategy, but not here. This is a fully refundable tax credit, which means it does not matter what I owe. The IRS will be writing checks a lot.

When there is a big carrot, there is often a line tied to it. Sadly, this is the case here. The government is not giving away a freebie. You have to pay back the credit. You have 15 years to do it, which means about $40 bucks a month.

The amount of money you make also can be a problem. Couples making more than $150k and non-couples making over $75k face a phase out problem. If you are making this kind of money, however, you probably should already own a home.

Everyone gripes about the loss of tax deductions, but they miss the points. Tax credits are the real golden egg for taxpayers. Claim as many as you can. If you are considering buying a home, this one should help a bunch.

⋅ ⋅ ⋅ ⋅ ⋅ ⋅