A simple guide to the $8,000 tax credit for first-time homebuyers

The government's new tax-credit program for first-time buyers is helping to spark home sales and boost values, but many Americans aren't using the plan because they don't understand the details.

Q. My wife and I would like to purchase our first home. Could you please explain how the new $8,000 federal tax credit for first-time buyers works? We have talked to a mortgage broker, two bankers and even someone from the Internal Revenue Service, but none of them could provide the information in "plain English."

A. Several readers have been asking for details about the recently approved program, so I am devoting this entire column to explaining how it operates.

The new credit was recently approved by Congress and signed into law by President Barack Obama as part of the government's efforts to bolster the housing market and stimulate the overall economy. The credit is available to first-time buyers who purchase a home between Jan. 1, 2009, and Dec. 1, 2009.

It's important to note that Congress defines the term "first-time buyer" loosely: To qualify, the purchaser or a spouse may not have owned a personal residence in the three years before their 2009 purchase. That's particularly good news for people who lost their home to foreclosure or sold it when the housing market started to soften a few years ago but now want to purchase a property at today's lower prices.

Q. What kinds of properties qualify for the program?

A. It's available to buyers of primary residences, be it a single-family home, a townhouse, a condominium or a co-op. It's not available to buyers of vacation homes or rental properties.

Q. Is $8,000 the maximum credit I can get?

A. Yes, $8,000 is the most you can get. You even might qualify for less than that amount, because eligibility is based on two factors: the price of the home and your income.

The credit is equal to 10 percent of the home's selling price, so you would receive less if the price you pay is below $80,000. The credit also decreases for single buyers who earn between $75,000 and $95,000, or for joint-filers who make between $150,000 and $170,000. Those who earn more are not eligible for the credit at all.

Q. Does the credit have to be repaid?

A. No, the credit does not have to be repaid - provided you live in the house for at least three years. If you sell before then, the credit must be paid back from the resale proceeds.

Remember that a tax credit is much more valuable than a tax deduction. That's because a deduction only saves you an amount equal to your tax bracket: If you have $8,000 in deductions (write-offs) and are in the 25 percent bracket, you'll save only $2,000 on your next tax bill.

Conversely, a credit is basically as good as cash. If you owe the IRS $2,000 when you complete your tax form next April 15 but have an $8,000 credit, Uncle Sam would wipe away the debt and send you a check for the remaining $6,000.

Q. Can the new credit be used in conjunction with the Federal Housing Administration's home-loan program?

A. Yes. Even better, the FHA is now allowing many buyers to use their expected windfall from the tax-credit program to make a down payment or cover "closing costs" that traditionally must have been paid in cash. The change has led to a sharp jump in applications for FHA loans and its assortment of low-down-payment plans.

Q. Do you really think that Congress and the Obama administration will let the new program expire on the Dec. 1 deadline they set, especially now that the housing market is showing signs of recovery?

A. I don't think so, but Congress and the White House - regardless of which political party or president has been in charge before - have always amazed me with their ability to screw up or even cancel a program that seems to be running well.

Legislation to extend the credit into next year was introduced in Congress several weeks ago, but little action was taken because lawmakers were readying themselves for their long summer break.

Realty lobbyists on Capitol Hill tell me there's a good chance that the legislation will be approved when Congress gets back to work, but there are certainly no guarantees. So, if you want to ensure that you'll get the tax credit, plan to start your house-hunting soon.

By the way, the same legislation that would extend the program beyond its current Dec. 1 deadline also would expand the tax credit so it would be available to nearly every buyer - regardless of whether they are a first-timer or "repeat purchaser" - and create a separate plan that would provide a $3,000 credit for homeowners who want to refinance. Consult with an accountant for more details.

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© 2009, Cowles Syndicate Inc.