First-Time Homebuyer Tax Credit FAQ's

As part of Housing Bill H.R. 3221, Congress has created a new, temporary tax credit to provide an incentive for first-time homebuyers. The $7500 credit will be available for the purchase of a principal residence on or after April 9, 2008 and before July 1, 2009.

The Basics

1. How does a tax credit work?

Tax credits are special provisions that reduce income tax liability on a dollar for dollar basis. Credits are claimed on an individual's income tax return. In this case, Congress has created a tax credit for first-time homebuyers. The maximum credit amount is $7500. Thus, if after figuring out all the income items and exemptions and making all the required additions, subtractions, deductions and other items on a tax return a person had total tax liability of $8000, a $7500 credit would wipe out all but $500 of the tax.

2. In the case of this new homebuyer tax credit, what happens if the purchaser is eligible for a $7500 credit but their entire income tax liability for the year is less than $7500?

This new tax credit is a so-called "refundable" credit. Thus, if the actual tax liability was $6000, the purchaser would receive a tax credit refund of $1500. The refundable amount is the difference between the $7500 credit amount and the amount of tax liability. (The term "tax liability" refers to the actual amount of tax computed on the tax return once all the computations are complete. The individual may already have "paid" their tax liability through withholding or estimated tax payments.)

3. Who can use the new tax credit?

Only first-time homebuyers are eligible to use the credit. A first-time homebuyer is defined as an individual who has not had an ownership interest in a principal residence in the previous three years. The 3-year period is measured as of the date of the purchase of the eligible principal residence.

4. Is there an income restriction?

Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals whose Form 1040 filing status is Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Individuals who file a Joint return may have income of no more than $150,000.

5. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?

Not always. The credit has a phase-out so that the closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. For this new credit, the credit amount is gradually reduced as an individual's income reaches $95,000 (single return) or $170,000 (joint return). Individuals with income about $95,000 ($170,000 joint return) will receive no tax credit.

For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown:

The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount. The denominator is $20,000 (specified by the statute).

In this example, the disallowed portion of the credit is 75% of $7500, or $5625 ($15,000/$20,000 = 75% x $7500 = $5625).

Stated another way, only 25% of the credit would be allowed. In this example, the allowable credit would be $1875 (25% x $7500 = $1875).

6. Is the amount of the credit tied to the price of the home?

Yes. The credit is for 10 percent of the cost of the home, up to a maximum credit of $7500. If a home cost $65,000, the allowable credit would be $6500. If a home cost $120,000, the allowable credit would be $7500. The amount of the credit is the same for all taxpayers, married or single.

7. What's the definition of "principal residence"?

Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling.

8. Are there restrictions on the location of the property?

Yes. Eligible property must be located in the United States. Property outside the U.S. is not eligible for the credit.

9. Are there restrictions related to the financing for the mortgage on the property?

Yes. If the financing is obtained by means of mortgage revenue bonds (i.e., through a tax-exempt bond-related financing program offered by a state housing agency), then the purchaser is not eligible for the tax credit.

10. Why do some news reports call the credit an interest-free loan?

Unlike most other tax credits, this tax incentive must be paid back. All eligible purchasers who claim the credit will be required to repay it over 15 years. The statute specifies that the repayment amount will be 6.67% of the credit amount each year. Thus, a buyer who qualifies for the full $7500 credit will repay $502.50 each year. There will be no interest charge on outstanding balances. (See "Repaying the Credit" below.)

11. How do I apply for the credit?

There is no pre-purchase authorization, application or similar approval process. Eligible purchasers will simply claim the credit on the appropriate IRS Form 1040 tax return and/or on any special forms the IRS might devise. In many, if not most cases, the IRS will be on notice that a purchase has occurred because the settlement officer at the time of purchase is required to report the transaction.

12. Can I use the credit amount as part of my downpayment?

Presently, there is no mechanism available for claiming the credit any earlier than the 2008 tax return that will be filed in 2009. Congress tried to devise a mechanism that would allow pre-funding of the credit, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

13. Is there any way to get any cash flow benefits before I file my 2008 tax return?

Any first-time homebuyers who believe they would be eligible for all or part of the credit may wish to modify their income tax withholding (through their employer) or to adjust their quarterly estimated tax payments.

14. I made an offer on a home that was accepted on March 27, 2008. We went to settlement on April 12, 2008. Do I qualify for the credit (assuming I meet all the other requirements)?

Yes. A home is considered "purchased" when all events have occurred that transfer the title from the seller to the new purchaser. If a property goes to settlement on or after April 9, 2008, then an otherwise qualified buyer would be eligible for the credit. Similarly, closings must occur before July 1, 2009 for purchases to be eligible for the credit.

15. If I don't make an eligible purchase until 2009, do I claim the credit when I file my 2009 tax return in 2010?

You'll have a choice. Qualified first-time homebuyers who make their purchase between January 1, 2009 and before July 1, 2009 are permitted to make an election to treat the purchase as if it had occurred on December 31, 2008. This election allows them (depending on the timing of the sale) to claim the credit on their 2008 tax return that is due on April 15, 2009. They may also elect to file their 2008 tax return after April 15 by filing for an automatic extension and claim the credit on the extended 2008 return. If they file their 2008 return before they have purchased the home, they may utilize this election and file an amended 2008 tax return. Of course they will always have the option of claiming the credit for the 2009 purchase on their 2009 return filed in 2010.

16. My sister and I are both single and want to purchase a home together. Will we each receive a $7500 credit?

No. The purchase of a residence will generate a tax credit amount that will total up to no more than $7500, no matter how many unmarried purchasers are buying the house.

17. My fiance and I bought a house on June 1, 2008. We'll get married in 2009. I owned a home in 2006. He's never owned a home. Will we get a credit? For 2008? For 2009?

It's pretty clear that you will not qualify for the credit for the 2008 purchase because you owned a home after June 1, 2005 (three years before the date of the purchase). But since you and your fiance were single when you made the purchase, he may qualify for the credit since he didn't own a home after June 1, 2005. If he's otherwise eligible, then he may be able to take the credit because you'll both file your tax return as Single for 2008. If you got married in 2008, neither of you could claim the credit. When purchasers file a joint tax return (as you would if you got married in 2008), both must be first-time homebuyers. Your 2009 marriage isn't relevant for this purpose.

18. My sister and I wish to purchase a home together. She previously owned a principal residence but sold it 2 years ago. I've never owned a residence. Can I qualify for a partial credit?

Possibly. The statute is somewhat ambiguous. Note though, that Treasury will no doubt provide guidance to clarify this ambiguity. As it presently stands, the stature specifically provides that for a married couple to be eligible for the credit, both must be first-time homebuyers. Similarly, the stature provides that if a married couple files their tax return as Married Filing Separate, then the credit is limited to $3750 each. By contrast, the statute directs the IRS to determine how the credit can be shared when two or more unrelated individuals purchase a home. In that case, the statute does not specify whether all the unrelated purchasers must be first-time homebuyers. You should check with a tax advisor.