The First-Time Buyer Tax Credit Explained
Dear Ali: I had heard that the new tax credit for first-time buyers was a refund. Then someone told me that I could actually get the money up front, which would be a lot more helpful since houses are still expensive. How does this work?
A: Sorry, someone was wrong. The first-time buyer tax credit, an attempt to get you to buy a home while the economy is in the doldrums, lets you claim a write-off of up to $8,000 if you buy before December 1, 2009. The idea is that you can go after that money when you file your 2009 taxes next year.
If you want to get the money back faster, you can adjust your withholding from each paycheck. The Maxsell real estate blog (head down to bullet point 19) does a good job of outlining those pros and cons, with the "pro" being that you file a new W-4 with your employer, so you're paying less in, and the "con" being that if you end up not buying the house, you're going to get hit with income taxes and possibly penalties. Also, the government will give you a time machine -- you can amend your 2008 return to push your 2009 home purchase to December 31, 2008, to claim the credit in the 2008 tax year. Depending on what your tax professional will charge you to file an amended return, though, I don't know if I'd advise it.
However, there's a third way. Columnist Luke Mullins over at U.S. News found a program in Missouri where the Missouri Housing Development Commission advances you a loan -- basically a second mortgage -- to help cover your closing costs, and then you pay off that loan with your tax credit later, when you get it.
Note to the nice people in Missouri (and I grew up a Razorback, so don't hit me with emails that I'm an eastern seaboard snob): bad idea. Note to other states that are supposedly considering similar programs: bad, bad idea.
Why? Because a buying a house is a major, major financial decision, and it shouldn't be too easy. If it's easy to buy a car, and then conditions change and your car gets repo'd, that's one thing; but it causes all sorts of human misery when someone comes to repo your house.
The best protection against that -- especially in these uncertain times where jobs seem shaky -- is to have a little bit of a financial cushion going in. At the height of the boom, I wrote in my book, Diary of a Real Estate Rookie, that I thought no-down-payment loans were crazy, and I still think so. If you want to buy a house, save up 10 percent of the cost of the house for your down payment. The market might still turn against you, but you'll be a heck of a lot safer than if you have no cushion at all.
If that lecture still hasn't scared you, you can click through to get some details on the Federal Housing Tax Credit. The three most important fun facts to know are:
1) You can be too rich to get the credit, which starts to evaporate once a couple's household income hits $150,000 ($75,000 for singles)
2) Congress's concept of a "starter home" is apparently $80,000 (the median price of an existing home is $165,400) since the credit equals 10 percent of the purchase price up to a maximum of $8,000
3) You can re-virginize (yep, I'm claiming that's a word, bet Diablo Cody wishes she wrote about housing right about now) every three years simply by not owning a primary residence. So if you bought a city home in 2001, bought a ski cabin in 2004, sold your city home in 2005 . . . you're still a first-time buyer as far as the Feds are concerned.
Neat, huh?