$8,000 First-time Home Buyers Incentive

The Obama government has provided an incentive for first-time home buyers who purchase homes from the start of the year until the end of November 2009. They may be eligible for a tax credit based on 10 percent of the value of the home or $8,000 (whichever is least). Remember a tax credit is very different from a tax deduction – a tax credit is equivalent to money in your hand, as opposed to a tax deduction which only reduces your taxable income.

The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000. Buyers will have to repay the credit if they sell their homes within three years.

Tax Credit Versus Tax Deduction

It’s important to remember that the $8,000 tax credit is just that – a tax credit. The benefit of a tax credit is that it’s a dollar-for-dollar tax reduction, rather than a reduction in a tax liability that would only save you $1,000 to $1,500 when all is said and done. So, if a home buyer were to owe $8,000 in income taxes and would qualify for the $8,000 tax credit, they would owe nothing.

Better still, the tax credit is refundable, which means the home buyer can receive a check for the credit if he or she has little income tax liability. For example, if a home buyer is liable for $4,000 in income tax, he can offset that $4,000 with half of the tax credit, and still receive a check for the remaining $4,000!

Homes that Qualify

The tax credit is applicable to any home that will be used as a principle residence. Based on that guideline, qualifying homes include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured or homes and houseboats used for principle residence also qualify.


Higher Loan Amounts

More good news – there is an extension on the additional tier of conforming loan amounts which had been first established in 2008. This tier of home loans are those greater than $417,000, and with a maximum that depends on the area, but is not greater than $729,750. These loans will again be eligible for rates that are slightly higher than conforming loan rates, but less expensive than the standard “jumbo” loan rates.

Phase-out Examples

According to the plan, the tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.

FIRST-TIME HOMEBUYER TAX CREDIT COMPARISON CHART

As Modified in the American Recovery and Reinvestment Act (Major Modifications Italicized)

February 2009 - Click image to enlarge.