Ask Stacy: How Come I Have to Repay the Home Buyers Tax Credit?

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If you bought a house in 2008, the tax "credit" you received wasn't really a credit at all - it was an interest-free loan from Uncle Sam.

Here’s a tax question I recently received regarding the tax credit for first-time home buyers. I’m sure that plenty of taxpayers nationwide are asking the same thing…

We purchased our home August 22, 2008, this was our first home and instead of receiving the tax credit they were offering, we are having to pay back a tax credit starting this year. I don’t understand this, if you could explain this to me, it doesn’t seem fair.

Here’s your answer, Fannie:

The credit for home buyers evolved several times over the last couple of years and was different depending on what year you bought your home. Here’s how the credit worked for homes purchased in 2008, 2009, and 2010, mostly taken straight from the IRS website:

For 2008 home purchases (see who qualifies here):

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time home buyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 home purchases (see who qualifies here):

The first-time home buyer credit was expanded by increasing the credit amount to $8,000, and purchases made in 2009 became eligible for the credit.  The credit does not have to be paid back unless the home ceases to be the taxpayer’s main residence within a three-year period following the purchase.

For 2010 home purchases (see who qualifies here):

The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, extended and expanded the first-time home buyer credit allowed by previous Acts.  Under this law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before Sept. 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return. This law also authorizes the credit of up to $6,500 for long-time homeowners buying a new principal residence, and raises the income limitations for homeowners claiming the credit.

Now you can see why Fannie is confused!

The down and dirty

To boil it all down: In 2008, Uncle Sam started with a $7,500 tax “credit” that was actually not a credit at all, but a 15-year interest-free loan.  In 2009, it grew from $7,500 to $8,000, became a “real” tax credit that didn’t have to be repaid, and was extended to those who had already owned a home.

If you think you qualify, however, be sure and click on the links above, because there are limitations – for example, the credit isn’t available to those with high incomes, and there are limitations on the time you had to own, or not own, a home prior to buying.

Credit vs deduction

Keep in mind that a tax credit is way better than a tax deduction. A deduction reduces the income you’re taxed on. A credit, however, reduces the actual taxes you owe, or increases your refund dollar-for-dollar.

Example: If you’re in the 25 percent tax bracket, an $8,000 deduction would reduce your taxes by $2,000 (25 percent of $8,000). But an $8,000 tax credit would reduce your taxes by $8,000 or increase your refund by that amount.

Fannie’s right – it’s not fair!

Fannie is comparing her 2008 version of the home buyers credit to the 2009 version and concluding that she was treated unfairly. I don’t blame her, since she has to pay her credit back and those qualifying for the 2009 version don’t.

While I can understand Fannie’s feelings, the violin I play for her is small. There are millions of Americans – including yours truly – who got zippo from Uncle Sam when they bought their houses. There are also millions of Americans who got nothing from Uncle Sam and are additionally now coping with a mortgage that’s way more than their home is worth.

You may not have done as well as some, Fannie, but you did a lot better than most.

Stacy Johnson

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