Economic Recovery Act of 2008 (Tax Credit) and the 2009 Stimulus Plan

Many of you may have heard a number of different things regarding the tax credit for first time homebuyers. This article is intended to clear up some misconceptions. This article is based on information available as of February 19, 2009. As with any new law, there are a number of uncertainties that will not be determined until the law is carried out. This is not intended to give you tax advice and we recommend that you consult with a licensed professional, preferably a Certified Public Accountant, when you seek your advice on their taxes.

On July 30, 2008, Housing and Economic Recovery Act of 2008 (H.R. 3221) was enacted, with the goal to stimulate the economy. The Act allowed a $7,500 tax credit for qualified first-time home buyers purchasing a home on or after April 9, 2008 and before July 1, 2009. The tax credit works like an interest free loan.

NOW, the $787 billion stimulus bill that President Barack Obama signed into law on February 17, 2009, allows up to an $8,000 tax credit for first-time homebuyers who purchase their home from January 1, 2009 to December 1, 2009.

If you have questions about the tax credit for first time homebuyers, call (502) 425-8717 or contact us to schedule an initial consultation. The real estate attorneys at The English Law Group P.S.C. are always ready to answer your questions and help with your residential real estate transaction in any way.

The Economic Recovery Act of 2008 allows first time homebuyers who bought their homes between April 9, 2008 and December 31, 2008 to choose to obtain a tax credit for ten percent of the sales price of their home, capping at $7,500. In the new stimulus package, first-time homebuyers can take a tax credit for ten percent of the sales price of their home up to $8,000. For both tax credits, the amount is the same no matter how many people buy the home, married, single or other. There is no pre-purchase authorization, application or similar approval process. A qualified first-time homebuyer will elect the tax credit on his or her Federal tax return.

Both Economic Recovery Act of 2008 and the $787 billion stimulus bill require that the home is used as a primary residence (occupy it 50% of the time), any home located in the United Sates purchased by an eligible first-time homebuyer will qualify for the credits. In addition, the taxpayer must be a first time homebuyer — purchaser or purchaser's spouse may not have owned a principle residence in the three years prior to the purchase. However, the homebuyer or homebuyer's spouse may have owned a vacation home or investment property. Note — property transferred between family members will not qualify for either tax credit.

In order to qualify for either the credit, a taxpayer must have an adjusted gross income of $75,000 or less ($150,000 or less for a married couple). Remember, all income is counted, whether made inside or outside the U.S. Those earning more than these thresholds may be eligible for reduced credits.

In regards to the original tax credit of $7,500, the repayment period starts 2 years after the year filing for the credit. The loan must be repaid at a rate of 6.67% per year (that's roughly $500 per year for the full credit of $7,500). REMEMBER - There is no interest that accrues on the amount received in the tax credit. If home is resold before 15 years, the remainder of credit is captured at sale. If the gain on the sale is less than the amount that must be repaid, the remaining portion of the liability will be forgiven.

Unlike the $7,500 tax credit, the $8,000 tax credit does not have to be repaid as long as the homebuyer stays in the home for three years. If the taxpayer sells the home before three years, he or she will be required to repay the credit. (Exceptions will be made in certain cases, such as death or divorce.)

There are still a number of uncertainties in this Act. The public has not been informed on how the IRS will keep track of these credits. It is also unknown how two unmarried persons buying a home will be seen when one is a first time homebuyer and the other is not.

Keep a lookout for updates regarding this Act. There will be an overwhelming amount of information put out by a number of different sources in the coming months. Be careful where you get your information and feel free to contact us with any questions.