first time home buyer’s tax credit

There is a new tax credit this year, aimed at first time home buyers.  If you bought your first home last year, you can claim a special $7500 tax credit on this year’s tax return.  If you are already getting a refund, even without this credit, the credit just adds to your refund.  If you owe money to the IRS, this credit will be reduced by what you owe.

The credit is available to anyone who purchased their first home between April 9, 2008 and July 1, 2009.  If you bought your first home between April 9 and the end of 2008, you can claim the credit on your 2008 tax return.  If you buy your first home between the first of 2009 and July 1, you can claim the credit on your 2009 return.  Which means there is still time.  If you’d like to buy a home, but are not sure if you can afford it, this credit might be just enough to put you over the line if you can do it in the first half of this year.  Of course, be sensible – don’t jump in over your head just to claim the credit.

What is a first time home buyer?

For purposes of this tax credit, “first time home buyer” means you can’t have owned your own home at any time during the past three years.  Which means if you owned your home in the past, had a three-year string of incredibly bad luck, during which time you rented, but now you are in position to buy again, you too can claim this credit.

Credit or loan?

Although this credit is called a “credit,” it is actually an interest free loan from the government.  You’ll get the $7500 now, but you’ll have to start paying it back in two years.  You’ll pay it back at a rate of $500 a year for 15 years.  This payback will either reduce your refund or increase the amount you owe on future tax returns.

One very sweet way to take advantage of the credit, and remove some of the sting of the loan, is to go ahead and claim the credit on your return, but then just sit on the money.  Park the $7500 in a bank or invest in a well-structured CD ladder.  The interest you earn is yours to keep.  It’s not much, but it’s more than you would have had without the credit.  You just have to make sure you have $500 available each year to pay back the government.

As narrowly defined as this credit is, I don’t imagine many people will be able to benefit from it.  If you were able to claim the credit, what did you think?  Was it worth it?  Let me know what you think.

This article originally appeared in the February 4, 2009, edition of the Greenhorn Valley View.

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