$7,500 First-Time Home Buyer Tax Credit Explained

As part of the Housing and Economic Recovery Act of 2008, the IRS authorizes a deduction of up to $7,500 for qualified first-time homebuyers. That means that if you quality, and we'll talk about that in a minute, the IRS wil give you $7,500 to offset any tax you might owe, will pay you the different between what you owe and the $7,500, or will cut you a check for the $7,500 if you don't owe any taxes.

This is an important point. It means that the IRS will be cutting some homeowners checks, depending on your tax liability for the 2008 or 2009 year. If you owe nothing to the government, you'll get a check for $7,500 at no interest. You can apply that to your house and have $7,500 of your mortgage in a 0% loan.

Here are the basic things to know about the program:

• The tax credit is available for first-time home buyers only.
• The maximum credit amount is $7,500.
• The credit is available for homes purchased on or after April 9, 2008 and before
  July 1, 2009.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
• The tax credit works like an interest-free loan and must be repaid over a 15-year period.

It's important to realize that this is not a typical tax credit, but rather a loan. The IRS webpage on the tax credit states:

"Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven."

So, it's important to remember that this is really a 0% loan that is being administered via the IRS for simplicity purposes. The intent of the loan is to help buyers afford a new house. The IRS states that:

"Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments."

The program was thrown together pretty quickly and there are still some details to work out. Michelle Singletary of the Washington Post posed some common questions to IRS representative Erik Smith that showed the IRS still has some work to do.

What's clear from the conversation is that the IRS hasn't fully thought through the implementation of the program. For instance:

Michele: Since this is a loan from the IRS, will the IRS be sending an annual loan statement to taxpayers?

Erik: The details of how the IRS will collect this money or inform people have not been worked out. Smith said a line would probably be added to the standard 1040 tax form to indicate that the credit should be paid as part of your tax liability.

Michele: Can I Pay Off the Loan Early?

Erik: The IRS hasn't yet come up with a system to accommodate an early payoff.

So, if you take the offer, you should realize there might be a few hiccups while the government works through the process. Still, if you are planning on buying a home, this looks like a way to finance at least $7,500 at 0%. That's a good deal to me.