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!)

Comments

  1. Jennifer Gniadecki

    I wouldn’t call it a gift, since it does have to be paid back. If you don’t pay it back within the time frame specified (say you forget) does interest go on there? Does the IRS put a lein on your house? Is it automatically put in with the escrow payments on the mortgage?

    If it were me, I’d ask if I could decline the credit. It sounds like something that’s going to get a lot of homebuyers in a bunch of trouble in fifteen years if they haven’t paid it back.

    Just my twisted perspective :)

  2. Kelly

    Oh Jenn, I meant the interest free part was a gift – in any other circumstance, an interest free loan has tax consequences. Not so here.

    You have to proactively claim the credit on your return – so you don’t *have* to take it.

    And I’m not sure about the repayment. My guess is that it would be treated like a regular tax bill – if you don’t pay, it goes to collections, then liens/levies/garnishes. But I’ll check.

  3. becky

    Don’t get me started. There are those of us in super-expensive markets that can’t afford even a first-time home. So they get no sympathy from me. Sounds like a nice, interest-free loan to me!

  4. Another Tax Geek, CPA

    It’s a pile of crap, just like the stimulus payments were.

    I can’t wait to see how many people screw up the repayments, or how convoluted the forms to recap the amounts due on sale of the house are going to be.

    I’ll just stick to my M-3’s and be happy.

  5. Urbie

    I agree it’s hogwash, but mostly just because there’s no way people are going to say, “Hey, let’s go out and buy a house, because we get $7500 off our tax bill for buying!”

    My wife and I would probably qualify — we used to own our home, but haven’t in 9 years (long story — we moved, then bought a piece of land with the intention of building a house, never built it, then moved again — so we live in another state, yet still own the land… go figure!). But there is absolutely no way this tax credit is going to enter into our decision-making process for whether or not we buy a house this year or next; that’s going to hinge on other factors (like what kind of jobs we have, etc.). The politicians who enacted this bill just want to be able to say, “Look what we’ve done to ease the housing crisis,” etc. It will accomplish little except to increase the federal deficit — people who were going to buy houses anyway will do so and now get a tax credit, but people who weren’t going to buy houses are not going to do so just because of the credit. It’s stupid.

    Urb

  6. Miranda

    Great analysis of the tax credit! I haven’t been a real fan of all this “stimulus” stuff — mainly because I think we’d do better with a little tough love and shifting our economy away from always spending money. As Urbie points out, this probably isn’t going to be the tipping point for anyone.

    And don’t forget that the credit is up to $7,500 or 10% of the purchase price, whichever is lower. SO, if my home were eligible, I would have got a $1,870 tax credit — money that I could easily have got for an addition to my down payment with a little planning or by raiding my emergency fund. Money that I wouldn’t have had to pay back at all, and that would have served the same purpose in reducing the amount I paid in interest.

  7. Rick

    Miranda,

    I think you have a decimal point in the wrong place. 10% of $75,000 is $7,500, I am guessing you bought your house for more than $18,700. This could actually work, what do you when you buy a house, you buy curtains and paint and furniture etc. It really won’t help with the down payment but will enable folks who did buy a house in this time period to not be so strapped to buy that stuff. It will be a royal pain to enforce and collect, the IRS is going to need a little more help.

  8. Oxnate

    Well, say what you will but this bill was the tipping point for me. I was already planning on looking for houses after this next tax season, but when I ran the figures it just made sense to take advantage of this now. My figures used 6.35% so I’m only saving $3,700. But that is still a wonderful “gift” from Uncle Sam.

    And I’m not whining at all.

    As far as repayment goes, I was of the impression that it would be a “additional tax” line on the 1040. But on repayment on sale of the house, you’re probably right about how bad those will be.

    -Good Luck and Happy Hunting

  9. Matty

    This legislation is ridiculous – can’t we all agree that we need to fire our congressman in November, and i mean ANYONE that is currently in office and coming up with this garbage. It isn’t a partisan issue, they are ALL idiots! A couple more years of this and the Middle East won’t just be buying NYC real estate (like the Chrysler building and the W hotel, let alone about 75% of the new construction of apts in manhattan), they’ll be branching out to your hometown! Then maybe the average american will realize what having such a weak currency means!

  10. Another Tax Geek, CPA

    Oxnate,

    I think you’re correct as far as the recapture of the credit in subsequent years. But when sold, if a gain, the remaining balance is due, and if a loss it’s forgiven (a sweet deal, too bad my lender doesn’t make such offers….). This is where I see do-it-yourselfers struggling. Can’t wait to see the form the IRS will design for this. I’m guessing it will be somewhat similar to the casualty loss form.

  11. Kelly

    Oxnate,
    Actually, my figures were off… You don’t have to begin repayment until 2 years after the initial credit (I forgot to work those 2 years into my calculations). With that, the interest would total 5,346.81 at 7%.

  12. Miranda

    Thanks, Rick, for correcting my math. :) Things have been a little stressful around here for me. At any rate, I agree that it might have helped, but collection and enforcement would have been a pain.

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  14. watcherkatt

    hey tax girl there is a dirty little secret the IRS is withholding all those payments. It now takes 4,5,6, months to get your rebate. I wonder what is up? has the IRS sent out checks to people who dont meet the requrements so now they are punishing us all? IRS has its collective finger up its butt. but no checks.

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