Sunday, January 16, 2011

Fist Time Home Buyer's Tax Credit - Payback Time

If you're one of the people who bought a home in 2008 and received the $7,500 tax credit it's payback time. (For those who purchased in 2009 or 2010 and received the $8,000 credit, this does not apply, as long as you still own the home). The original First Time Home Buyer's Tax credit was actually a loan. The $7,500 has to be paid back over 15 years, starting this year.

The loan is interest fee, so you only have to pay back $500 each year. Form 5405 contains instructions for the payback. You also have to pay back the credit (either $7,500 or $8,000) if you keep the house less than three years. In this case, the amount is due back in the tax year that you sold the house. The amount of repayment is limited to any gain you might have on the sale of the home. Some other exclusions apply, but read the form and instructions for full details.

It may seem unfair to the 2008 home buyer that he only received $7,500 and has to pay it back while the 2009 or 2010 home buyer received $8,000 and he gets to keep it. Fair or not, that's the tax law. It's possible that congress would change to law to forgive the $7,500 loan, but my guess is, it won't. The current congress is more interested in reducing the debt than helping one small group of taxpayers. The realtors who fought so hard for the credit have now moved on to new buyers and aren't likely to fight for a tax break for the buyer from three years ago.

One bit of good news is that the $7,500 was real money. If you had taken that money and invested in a small CD making 2% interest (I know that's hard to find now, but let's assume), you would end up with over $2,000 at the end of the payback time. Of course, the intent of the tax credit was to stimulate the economy, so it's better if you actually spent that money instead of bankrolling it.

1 comment:

Anonymous said...

The first-time home buyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed.

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