A first Time Home Buyers Guide to Taxes

Both houses of Congress passed the American Economic Recovery and Reinvestment Act of 2009. There were a lot of provisions in the bill that will provide funding to education, telecommunications and infrastructure. In the bill, there were also a number of tax credits. Each individual will receive a $1000 tax credit. In addition, there will be an added $2500 education tax credit. Perhaps the most interesting tax-change in the bill is an $8,000 tax credit for first-time home-buyers in 2009.

Originally, the bill had called for a $15,000 tax credit, but was scaled back to $8,000 in the finalized version of the bill. The previous first-time home-buying credit was $7,500. However, home-buyers had to pay that money back over the next several years. The new tax credit in ARRA has no repayment requirement. It’s a true tax credit, not a tax deduction. In essence, buying a home during the year of 20009 will net you $8,000 in cash. Chances are you will end up getting most of this money back in the form of a tax-return during the spring of 2010.

There are some income limitations in this piece of legislation. The tax-credit will phase out for individuals that make more than $75,000 per year or married couples who file jointly making more than $150,000 per year.

There are some limitations to this bill. If you sell the home within the next three years, you will forfeit the tax credit and have to pay it back to the IRS. You will also be required to make at least a 5% down payment on your home to qualify for the credit. The tax credit will go into effect when President Obama signs the law, but even if you’ve already purchased a home in 2009, you may still qualify.

There will undoubtedly be some additional details that will be announced by the executive branch that you’ll want to take into consideration before buying a house based on the tax credit. You’ll want to read the text of the law itself, read the briefings from the IRS and make sure that you qualify for the tax credit.

Overall, this will be a great boom for the housing market and a great opportunity for renters and other potential homebuyers. You don’t want to go out and buy a home if you can’t afford one, but if you’re at a place where you could buy one anyway, now might be a great opportunity.

The actual text of the bill can be found here: http://appropriations.house.gov/pdf/Recovery_Bill_Div_B.pdf. The section which discusses the home-buying credit starts on page 25.