Explanation of the First-time Homebuyer Tax Credit

Real Estate

The homebuyer tax credit was created to help people purchase homes.
Mike Watson Images/moodboard/Thinkstock

In the past, homebuying was simple and straightforward. However, now the process is complex, fraught with contracts, terminology, and the fear of large mortgages that often discourage potential buyers from investing in their own homes.

In 2008, the first-time homebuyer credit was introduced by former President George W. Bush and the US government as part of the Housing and Economic Recovery Act of 2008. The credit was designed to encourage people to take the first step towards homeownership and revitalize the American housing market, which had been in decline since 2006 [sources: Baker, The Economist]. The housing business community was also struggling, with builders and suppliers losing significant amounts of money each month.

The initial tax credit (version 1.0) was available to first-time homebuyers who closed on homes between April 8, 2008, and January 1, 2009. It worked like an interest-free loan, which had to be repaid over a 15-year period through the purchaser’s federal income tax return. This meant that people who received the maximum $7,500 credit would have to repay $500 per year starting from their 2010 tax returns [source: IRS]. For most people, the credit repayment involved filling out IRS form 5405, “Repayment of the First-time Homebuyer Tax Credit,” and attaching it to Form 1040.

President Barack Obama expanded the credit as part of the American Recovery and Reinvestment Act of 2009, but made significant changes to the original version. First, it became an actual credit, meaning that homeowners who followed all the rules wouldn’t have to repay it at all! The amount also increased to a potential $8,000, which encouraged many buyers to take the plunge [source: Bell].

There were a lot of regulations that had to be met in order to take advantage of the credit. These regulations will be discussed in detail on the following page.

Details of the First-time Homebuyer Tax Credit

A real estate agent stands at the door of a house in Silver Spring, Maryland, where she held an open house in 2010 at the height of the homebuyer tax credit buying rush.
© JONATHAN ERNST/Reuters/Corbis

With the housing bubble bursting and the 2008 recession taking hold, many potential homeowners were hesitant to make a large financial commitment to buying a home. However, the First-Time Homebuyer Credit reduced some of the financial risk and encouraged people to invest in their own properties. “The newer homes in the area we wanted to live were out of our price range,” explains Christy Cook, who took advantage of the credit in 2009. “We opted to buy an older home, so the tax credit helped us to fix some things that needed attention, which we wouldn’t have been able to do otherwise.”

The credit was available to first-time homebuyers between April 8, 2008, and May 1, 2010, and could only be used for the purchase of a full-time dwelling. In other words, it was not allowed to purchase a home and then convert it into a profitable rental or vacation home. Interestingly, if a person bought a home and lived there full-time, they could rent out other parts of the property and still be eligible for the credit [source: IRS].

The term “first-time buyer” was not rigid and flexible enough to accommodate those who had never owned a home or had not owned a house in at least three years. The maximum credit available was $7,500 or $8,000, depending on the year of purchase, and could be up to 10% of the purchase price of the house, allowing homebuyers in the $75,000/$80,000 price range to take full advantage of the perk. The U.S. government extended the credit to long-time homeowners who wanted to upgrade their homes. The maximum credit for them was $6,500, and they had to have owned and used the property as their primary residence for at least five years. However, families interested in selling their starter home for a more extensive home could also benefit from the credit. Nevertheless, there were a few basic regulations that had to be followed. The credit was only eligible for a person who qualified as a first-time homebuyer or a long-time homeowner. Any principal residence, including single-family houses, townhomes, apartments, duplexes, mobile homes, and even travel trailers, could be purchased as long as it could be affixed to land. However, personal income and income limits were a deciding factor. The credit was either lowered or eliminated for buyers who made too much money. In addition, nonresident aliens and buyers purchasing a home from a close relative could not receive the credit. If a homeowner decided to sell the house or stop using it as a primary residence less than 36 months after closing on the property, the credit had to be repaid in full via the income tax return of the affected year.

The 2008 interest-free loan “credit” required repayment of all remaining installments if the recipient moved. However, if the seller did not make a profit or lost money on the home sale, the repayment could be reduced or eliminated. The success of the first-time homebuyer tax credit, which cost the U.S. government $16.2 billion and had 2.3 million participants, is debated. According to the Center for Economic and Policy Research (CEPR), the credit initially boosted home sales and prices until it expired in April 2010. However, the flood of buyers left a dearth of buyers for the rest of 2010 and 2011, causing housing prices to fall another 8.4 percent. Some experts claim the credit allowed some home sellers to get inflated prices for their homes, while some homebuyers paid more than they would have otherwise. Mortgage lenders and home builders were the clear winners. The credit helped some people put down roots earlier than expected, while others had to pay back the government or could not make mortgage payments. Several states offer programs specifically for first-time homebuyers.

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Sources

• Baker, Dean. “First Time Underwater.” Center for Economic and Policy Research. April 2012 (accessed November 12, 2014) http://www.cepr.net/documents/publications/housing-2012-04.pdf
• Bell, Kay. “5 questions about the homebuyer tax credit.” Bankrate. 2014 (accessed November 10, 2014) http://www.bankrate.com/finance/taxes/5-questions-about-the-homebuyer-tax-credit-1.aspx
• Bell, Kay. “Homebuyer Tax Credit Claims and Payback.” Fox Business. February 21, 2013 (accessed November 10, 2014) http://www.foxbusiness.com/personal-finance/2012/02/16/homebuyer-tax-credit-claims-and-payback/
• Cook, Christy. Email interview. November 11, 2014.
• IRS. “First-Time Homebuyer Credit Questions and Answers: Basic Information.” November 6, 2009 (accessed November 10, 2014) http://www.irs.gov/uac/First-Time-Homebuyer-Credit-Questions-and-Answers:-Basic-Information
• IRS. “Tax Credit to Aid First-time Homebuyers; Must Be Repaid Over 15 Years.” September 16, 2008 (accessed November 10, 2014) http://www.irs.gov/uac/Tax-Credit-to-Aid-First-Time-Homebuyers;-Must-Be-Repaid-Over-15-Years
• Manni, Tim. “Is the first-time homebuyer tax credit still available?” HSH. June 9, 2014 (accessed November 10, 2014) http://www.hsh.com/finance/real-estate/is-the-first-time-homebuyer-tax-credit-still-available.html
• Manni, Tim. “States with the best homebuyer assistance programs.” HSH. September 7, 2012 (accessed November 12, 2014) http://library.hsh.com/articles/first-time-homebuyers/states-with-the-best-homebuyer-assistance-programs.html
• O’Neill, Ryan. Email interview. November 11, 2014.
• The Economist. “The origins of the financial crisis: crash course.” September 7, 2013 (accessed November 12, 2014) http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article

FAQ

1. What was the First-time Homebuyer Tax Credit?

The First-time Homebuyer Tax Credit was a government program that provided a tax credit of up to $8,000 for first-time homebuyers. It was designed to stimulate the housing market and help people who were struggling to afford a home. The credit was available for homes purchased between April 8, 2008, and April 30, 2010.

2. Who was eligible for the First-time Homebuyer Tax Credit?

To be eligible for the First-time Homebuyer Tax Credit, you had to meet certain criteria. You had to be a first-time homebuyer, which means you hadn’t owned a home in the previous three years. You also had to purchase a home between April 8, 2008, and April 30, 2010, and meet certain income requirements. The credit was gradually phased out for individuals with incomes above $75,000 and couples with incomes above $150,000.

3. How did the First-time Homebuyer Tax Credit work?

The First-time Homebuyer Tax Credit was a tax credit, not a deduction. That means it reduced your tax bill dollar-for-dollar, up to a maximum of $8,000. If you owed less than $8,000 in taxes, you would receive the full amount as a refund. If you owed more than $8,000 in taxes, the credit would reduce your tax bill by $8,000.

4. Did the First-time Homebuyer Tax Credit have any limitations?

Yes, the First-time Homebuyer Tax Credit had some limitations. It was only available for homes that were purchased for $800,000 or less. You also had to live in the home for at least three years, otherwise, you would have to repay the credit. Additionally, if you sold the home within three years of purchasing it, you would have to repay a portion of the credit.

5. Is the First-time Homebuyer Tax Credit still available?

No, the First-time Homebuyer Tax Credit is no longer available. The program ended on April 30, 2010, and there have been no similar programs since then. However, there are other programs available to help first-time homebuyers, such as FHA loans and down payment assistance programs. It’s also worth checking with your state and local government to see if they offer any programs to help first-time homebuyers.