Prospective first-time home buyers who have been considering the purchase of a home now have a significant financial incentive to explore the opportunities available in today’s housing market.

H.R. 3221, the Housing and Economic Recovery Act of 2008 allows first-time home buyers who have not owned a home during the past three years and are U.S. citizens who file taxes are eligible to take a $7,500 tax credit from the purchase of a single-family home, town home or condominium apartment. (Some home buyers who are not citizens may also qualify). To qualify, buyers must close on the sale of the home on or after April 9, 2008 and before July 1, 2009.

The program has income limits. Single or head-of-household filers can claim the full $7,500 credit if their adjusted gross income (AGI) is less than $75,000. Married couples filing a joint return have a limit of $150,000. Single or head-of-household taxpayers who earn between $75,000 and $95,000 and married couples who earn between $150,000 and $170,000. are eligible to receive a partial first-time home buyer tax credit.

This is a refundable credit, which means that if a taxpayer pays less than $7,500 in federal income taxes, the government will write them a check for the difference. For example, if $5,000 in federal taxes is owed, the taxpayer would pay nothing and a $2,500 payment would be received from the IRS. If a qualifying home buyer were owed a $1,000 tax refund, they would receive $8,750. Buyers who close in 2008 take the credit on their 2008 return. Buyers in 2009 have the option of taking the credit on their 2008 or 2009 returns.

The tax-credit program also has payback provisions. which means the credit serves as an interest-free loan. It is repaid over 15 years. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. If the home is sold before 15 years, the remaining credit would be due from the profit of the home sale. If there is insufficient profit, then the remaining credit payback would be forgiven.

1. Who is eligible to claim the $7,500 tax credit? First time-home buyers purchasing any kind of home new or resale are eligible for the tax credit.

2. What is the definition of a first-time home buyer? The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase.

3. Are there income limits to take the tax credit? Yes. Those as single or head-of-household taxpayers are eligible their modified adjusted gross income (MAGI) in the year of the purchase (except for some 2009 purchases) is less than $75,000. For married taxpayers filing a joint tax return, the MAGI limit is $150,000.

5. What is modified adjusted gross income? Modified adjusted gross income, or MAGI, is defined by the IRS. To find it, a taxpayer must first determine adjusted gross income, or AGI, On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education.

6. If my income is above the limit, do I qualify for any tax credit? Possibly. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceed the phase-out limits. The limit at which no credit is available is MAGI of $95,000 filing single and $170,000 married filing joint,

7. What is the difference between a tax credit and a tax deduction? A tax credit is a dollar-for-dollar reduction in what the taxpayer owes.

8. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program? No.

9. What are the payback provisions? The tax credit is repaid, without interest, over 15 years or when the home is sold, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.

10. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return? Yes. The law allows taxpayers to choose (elect) to treat qualified home purchases in 2009 as if the purchase occurred on Dec. 31, 2008. IN this manner the buyer can choose to utilize the credit based upon the tax year that is most beneficial.

The National Association of Home Builders (NAHB) and National Association of Realtors (NAR) have provided the above information regarding the First Time Buyer Tax Credit. Please let me know if I can assist you.