Starting today and continuing for the next handful of posts, I want to explore some of the interesting parts of this new law. How will it help homeowners? How will it help first-time buyers? How will it help America? And what are its drawbacks? It’s only right that we get an understanding of what’s going on in real estate.
Here are the highlights:
- First-time home-buyer tax credit up to $7,500
- Major increases in capital gains tax
- FHA Foreclosure Rescue
- Prohibition of Seller-funded downpayment programs
- Conforming loan limit increases to $625,000 in high-cost areas
- Neighborhood revitalization funds (up to $4 Billion)
The first part of HR 3221 to understand is the Homebuyer Tax Credit. Now you will undoubtedly hear this touted from Realtors, builders and others. But you would do well to read the fine print. Here’s how I see it working.
- Only available for first-time home buyers – no homeownership for past 3 years
- Get a tax credit of 10% of your home purchase price, up to $7,500
- The credit must be repaid on your federal income taxes at the rate of 6.67% per year
- If the home is sold, the pro-rata remainder must be collected and returned to the IRS
- Applies to purchases between April 2008 and July 2009
- Buyers must have income below $75,000 single, $150,000 couple.
So what do you think? Sound like a good deal?
Well, you get to reduce your federal tax bill in the year you purchase, so you are essentially borrowing from the government. This is going to generate enormous tax refunds to Americans. So its not only an incentive to buy, it will stimulate the economy. Just be sure you realize it has to be paid back.
Taking an average central Ohio example, the Smiths buy their first home for $250,000, and fit the income guidelines for this tax credit. They get to claim $2,500 tax credit on their taxes files in April 2009. When you wash their tax liabilities against their payroll deductions, they end up getting a $4,200 tax refund in May ($1,500 normal refund plus $2,500 homebuyer credit). If they are like most Americans, the money will disappear into vacations, home improvements and debt reduction before the end of summer.
When they file taxes in 2010 (and going forward), they have to pay back the credit by adding $167 (remember, 6.67%/year) to their tax bill. This reduces their refund in the summer of 2010 from $1,500 to $1,333. No big deal.
Ohioans, on average, move every 4-5 years. If the Smiths follow that average, they would sell the home in 2013 and have an IRS charge of $1,665 (6.6% x 5 years) on their settlement statement. Again, that’s not going to make or break most home sales.
Assuming that there are a million first time home buyers next year, that means the U.S. Treasury will lend without interest about $2.5 BILLION. Those are your dollars!
As always, though, remember that I am a mortgage guy and not a qualified accountant. If you think the new tax credit rules will impact you personally, get professional advice about it.
