Housing Tax Credit of $7500

So I have received a lot of questions regarding the new housing credit of $7500 for first-time homebuyers. So to better explain it I have a list of FAQ about the tax credit that I thought would help all of you. This is kind of long, so you can just pick and choose the questions you want to know the answers to.

1. Who is eligible to claim the $7,500 tax credit?
First time home buyers purchasing any kind of
home—new or resale—are eligible for the tax
credit. To qualify for the tax credit, a home purchase
must occur on or after April 9, 2008 and before
July 1, 2009. For the purposes of the tax credit,
the purchase date is the date when closing occurs.

2. What is the definition of a first-time homebuyer?
The law defines "first-time home buyer" as a buyer
who has not owned a principal residence during the
three-year period prior to the purchase. For married
taxpayers, the law tests homeownership history of
both the home buyer and his/her spouse. For example,
if you have not owned a home in the past three
years but your spouse has owned a principal residence,
neither you nor your spouse qualifies for the
first-time home buyer tax credit.

3. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home
buyer will qualify for the credit, provided the home
will be used as a principal residence and the buyer
has not owned a home in the previous three years.
This includes single-family detached homes, attached
homes like townhouses, and condominiums.

4. Instead of buying a new home from a home
builder, I’ve hired a contractor to build a home on
a lot I already own. Do I qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit,
a principal residence that is constructed by the
home owner is treated by the tax code as having
been "purchased" on the date the owner first occupies
the house. In this situation, the date of first occupancy
must be on or after April 9, 2008 and before
July 1, 2009.

In contrast, for newly-constructed homes bought
from a home builder, eligibility for the tax credit is
determined by the settlement date.

5. Can you give me an example of how the partial tax
credit is determined?
As an example, assume a married couple has a
modified adjusted gross income of $160,000. The
applicable phase out to qualify for the tax credit is
$150,000, and the couple is $10,000 over this
amount. Dividing $10,000 by $20,000 yields 0.5.
When you subtract 0.5 from 1.0, the result is 0.5.
To determine the amount of the partial first-time
home buyer tax credit that is available to this couple,
multiply $7,500 by 0.5. The result is $3,750.

6. Does the credit amount differ based on tax filing
status?
No. In general, the credit is equal to $7,500 for a
qualified home purchase, whether the home buyer
files taxes as a single or married taxpayer. However,
if a household files their taxes as "married filing
separately" (in effect, filing two returns), then the
credit of $7,500 is claimed as a $3,750 credit on
each of the two returns.

7. I heard that the tax credit is refundable. What does
that mean?
This means the home buyer credit can be claimed
even if the taxpayer has little or no federal income
tax liability to offset. Typically this involves the government
sending the taxpayer a check for a portion
or even all of the amount of the refundable tax
credit. For example, if a qualified home buyer expected,
notwithstanding the tax credit, federal income
tax liability of $5,000 and had tax withholding
of $4,000 for the year, without the tax credit the
taxpayer would owe the IRS $1,000 on April 15th.
Supposing the taxpayer qualifies for the $7,500
home buyer tax credit. As a result, the taxpayer
would receive a check for $6,500 ($7,500 minus
the $1,000 owed).

8. What is the difference between a tax credit and a
tax deduction?
A tax credit is a dollar-for-dollar reduction in what
the taxpayer owes. That means that a taxpayer who
owes $7,500 in income taxes and who receives a
$7,500 tax credit would owe nothing to the IRS. A
tax deduction is subtracted from the amount of income
that is taxed. Using the same example, assume
the taxpayer is in the 15 percent tax bracket
and owes $7,500 in income taxes. If the taxpayer
receives a $7,500 deduction, the taxpayer’s tax liability
would be reduced by $1,125 (15 percent of
$7,500), or lowered from $7,500 to $6,375.

9. Can I claim the tax credit if I finance the purchase
of my home under a mortgage revenue bond (MRB)
program?
No. The tax credit cannot be combined with the
MRB home buyer program.

10. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as
defined by the IRS), who has not owned a principal
residence in the previous three years and who
meets the income limits test may claim the tax
credit for a qualified home purchase. The IRS provides
a definition of "nonresident alien" in IRS Publication
519.

11. Will I be required to pay back to the government?
If so, what are the payback provisions?
Yes, the tax credit must be repaid. 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.

12. Why must the money be repaid?
Congress’ intent was to provide as large a financial
resource as possible for home buyers in the year
that they purchase a home. In addition to helping
first-time home buyers, this will maximize the
stimulus for the housing market and the economy,
will help stabilize home prices, and will increase
home sales. The repayment requirement reduces the
effect on the Federal Treasury and assumes that
home buyers will benefit from stabilized and, eventually,
increasing future housing prices.

13. Because the money must be repaid, isn’t the firsttime
home buyer program really a zero-interest
loan rather than a traditional tax credit?
Yes. Because the tax credit must be repaid, it operates
like a zero-interest loan. 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 is called
a tax credit because it operates through the tax code
and is administered by the IRS. Also like a tax
credit, it provides a reduction in tax liability in the
year it is claimed.

14. If I’m qualified for the tax credit and buy a home in
2009, can I apply the tax credit against my 2008
tax return?
Yes. The law allows taxpayers to choose ("elect") to
treat qualified home purchases in 2009 as if the purchase
occurred on December 31, 2008. This means
that the 2008 income limit (MAGI) applies and the
election accelerates when the credit can be claimed
(tax filing for 2008 returns instead of for 2009 returns).
A benefit of this election is that a home buyer
in 2009 will know their 2008 MAGI with certainty,
thereby helping the buyer know whether the income
limit will reduce their credit amount.

15. For a home purchase in 2009, can I choose
whether to treat the purchase as occurring in 2008
or 2009?
Yes. If the applicable income phase out would reduce
your home buyer tax credit amount in 2009
and a larger credit would be available using the
2008 MAGI amounts, then you can choose the year
that yields the largest credit amount.