First Time Home Buyers Are Cry-Babies

Okay, maybe not all of them. I was a first time home buyer once, too.

** Oh sorry, I just drifted off to a dreamland involving no screaming kids or barking dogs. **

But the latest rounds of criticisms of the Housing and Economic Recovery Act of 2008 have gotten to me.

I’ll just say upfront that I’m not a fan of the Act. I personally don’t think that it’s good policy for a lot of reasons. Primarily, I am not keen on bailing out an industry that dug its own grave.

However, it is what it is and it’s not all bad. Two of the provisions are particularly note worthy from a tax perspective.

One, for the 2008 tax year, taxpayers who do not itemize but pay property taxes will receive up to a $500 additional standard deduction, or $1,000 for married couples (if your property taxes are lower, you can only claim the amount paid - and if your property taxes are actually lower, please, please tell me where you live!). This is a nice nod, I think, to seniors and high income taxpayers who largely missed out on the last economic stimulus package. It’s not terribly common for homeowners to take the standard deduction - the mortgage interest deduction is what tends to make it worthwhile for many taxpayers to itemize. But those that may take the standard deduction and own a home tend (though not always) to be seniors or higher income folks who have already paid off their home mortgage.

The other provision - the tax credit for first-time home buyers - is the one that’s getting the most press, and the one that’s driving me nuts. It’s not so much bothersome because of the credit, again, it is what it is, but moreso for the loud whining from potential home buyers. I keep hearing, “Why don’t you give us more?”

I’m sorry, what?

Here’s the skinny on the tax credit… It’s a tax credit for first-time home buyers. First-time buyers are defined as those who have not owned a principal residence (vacation homes and rentals don’t count against you) during the three-year period prior to the purchase of a new home. If you’re married, your spouse’s home buying history will affect your own for purposes of this credit.

To qualify for the credit, you must close on the purchase of a new primary residence (not a vacation home or rental) between April 9, 2008 and July 1, 2009. If you’re building a new house, you must plan to occupy the house between those dates.

DC residents who take the DC home buying credit on their personal returns can’t claim both credits. And nonresident aliens may not claim the credit (for information about nonresident spouses, see my prior article on the subject).

If you qualify, you can take a tax credit of up to $7,500 on your 2008 tax return. To take the maximum credit, you must fall within the modified adjusted gross income (MAGI) restrictions: up to $75,000 for single taxpayers and $150,000 for married couples. After those income restrictions, phase outs apply.

Here’s how it works: a tax credit reduces your federal tax liability dollar for dollar, as opposed to a deduction which merely reduces your taxable income. If your deductions exceed your income, in most cases, as an individual, you’re out of luck. But if your credits exceed your taxable liability, you are entitled to a refund.

What this means, practically speaking, is that this credit offsets your tax liability in a fairly significant manner, entitling you to a big fat check from the government. It is, in other words, free money.

Only it’s not really free: the tax credit must be “repaid” over a 15-year period.

Home buyers who take advantage of the credit will be required to repay the credit to the government over a period of 15 years or when the house is sold if there is sufficient capital gain from the sale. Payments must begin two years after the credit is claimed, so taxpayers who take the credit in 2008 must begin repayment with the 2010 tax return and taxpayers who take the credit in 2009 would begin repayment on the 2011 tax return.

The repayment is a straight line repayment over 15 years with no interest. So if the maximum credit is claimed in 2008, a taxpayer would begin repaying the credit in 2010 at the amount of $500 per year ($7500/15 years = $500 per year). If you sell the home within those 15 years, the payback is accelerated from the profit on the home. If there is not enough gain on the sale to pay back the credit, the remaining credit is forgiven.

In other words, this is a carefully designed interest-free, no risk (to the borrower) loan.

The idea is the credit will act as a stimulus for the housing economy (yep, there’s that word again). This extra cash incentive should incite potential home buyers to buy sooner rather than later.

With today’s lending rates, the incentive works out to a pretty good deal. At 7% interest, a taxpayer would have paid $4,200 in interest payments to a “regular” lender over the term of the repayment. But this is cash in hand, with no interest to pay. Not a bad deal, huh?

Only this is where the whining starts.

Why, the crybabies ask, do we have to give it back at all?

Because, well, to do otherwise wouldn’t quite be fair to everyone else, would it? And it could likely skew the real estate market - if sellers understand that you’re getting cash back, they would adjust their prices upwards accordingly. And more significantly, it would be incredibly costly at a time when the government doesn’t have the cash to hand out $7,500 checks.

And that’s the part that I don’t get. This is a hand out. It is an interest free cash advance from the government - the forgiven interest can total thousands of dollars to you without penalty. It is something that you would have been otherwise not entitled to. It is a gift.

Stop your whining.

(and now, I get off of my soapbox - temporarily, of course!)