$7,500 Tax Credit for First-Time Home Buyers

Editor's Note: I am posting this in response to many questions we have received about the tax credit for first-time home buyers in the U.S. So if you recently asked a question about the $7,500 tax credit and whether or not you qualify, please read through the information below.

Summary of First-Time Home Buyer Tax Credit

I think this program is going to confuse a lot of home buyers, at least initially. That's because of the terminology being used to describe. It is a tax credit at first, in the sense that you can claim it when filing your taxes. But in truth, it's more like a loan because you have to pay it back over time. Yes, you heard me right ... you have to pay the entire amount back over a 15-year period. The $7,500 amount is also misleading, because not everyone will qualify for that amount.

So if you haven't done so already, I urge you to read all of the details about the tax credit program. This blog post will give you a basic overview of how it works. Here are some of the frequently asked questions we have received about this new benefit for first-time buyers in the U.S.

What is this credit?
As part of the recently passed Housing and Economic Recovery Act, many first-time home buyers in the United States can qualify for a tax credit of as much as $7,500 when they purchase a home. Technically, it's a credit for 10% of the purchase price up to the $7,500 limit. It works a lot like a 15-year interest-free loan, meaning you have to pay it back in annual installments (beginning the second year after you get the tax credit).

How long does the program run?
As with all good things in life, there is a time limit on this tax credit. It is applied retroactively back to April 9, 2008 and will run until July 1, 2009. This means that home buyers who purchased earlier in 2008 (before the bill was even passed) could be eligible for the $7,500 tax credit ... if they are otherwise qualified under the eligibility guidelines.

Who is eligible for the tax credit?
Now we are getting to the real question many first-time home buyers have right now. Am I qualified for the $7,500 credit under this new program? Here's an overview of the guidelines for eligibility:

• You must be a first-time home buyer to participate in this program. Within the context of this bill, that means you haven't owned a home in the three years prior to buying one now.
• The property you are buying must be a single-family home to be used as your primary residence. In other words, it doesn't apply to investment properties.
• Your closing date must fall within the program's window, between April 9, 2008 and July 1, 2009.
• There are income limits as well. If your annual gross income is $75,000 or less (or below $150,000 for a joint tax return), you could qualify for the full credit amount. If you make more than that, you will receive less than the full tax credit when buying the home. If you make more than $95,000 a year (or $170,000 on a joint return), you will not qualify for the program.
  

These are not the only eligibility guidelines for the first-time home buyer program, nor do I have any desire to republish the entire bill here on this blog. If you want to find out if you are eligible for the tax credit I recommend starting with this IRS explanation of this program. After all, you'll be claiming the credit on your tax return, so who better to listen to than the "Tax Man" himself?

There's a new IRS form specifically for this program. So if you want to claim the credit when you file your taxes, you'll need the IRS Form 5405.