How ironic is it that at a time when there are unprecedented home foreclosures that there is also a new tax credit for first time home buyers? To say that this is a paradox, which is defined as an absurdity is almost an understatement in our current economic environment. But it’s important to know that sometimes a credit may not be exactly a credit. It may be a loan in disguise. Brings to mind that ageless question, if it looks like a duck, and walks like a duck, is it a duck?

That being said, if you are a first time homebuyer and you are lucky enough to find financing available now, there is a new tax credit available for you. The credit is available to first time home buyers who purchase a home on or after April 9, 2008 and before July 1, 2009 as long as the buyer had no ownership interest in a principal residence in the US in the 3 years prior to the purchase of the home.

The Homebuyer Credit is a refundable credit. This means that even if the taxpayer’s tax liability is zero the credit will be refunded. It means that even if you own no tax you will receive this refund. The credit is equal to the lesser of $7,500 ($3,760 for MFS) or 10% of the purchase price of the principal residence.

It is taken in the year of purchase, which is the year in which the title closes. In the case of a new home construction, the date of purchase is considered the date of occupancy. A taxpayer may elect to treat an eligible 2009 purchase as if purchased on December 31, 2008 to claim the credit on their 2008 return.

Now there is a down side to this credit. It is subject to recapture. This means that you will have to pay it back over the next 15 years. It is in effect a no-interest loan from the government. If a person receives the maximum amount of $7,500 they will have to pay back $500 per year. This will occur by their tax liability being increased by that amount each year. Now, if the home is sold before the 15 year term ends, the full balance of the liability from the credit is due on the tax return for the year of the sale.

So, it is money available upfront for home buyers. It is being called a refundable credit but it is in effect a no-interest loan. Makes one wonder why they didn’t just call it The Homebuyer No-Interest Tax Loan, since that’s what is it. We’ve all heard that saying “if it looks like a duck, and it walks like a duck, it’s a duck.” Do you hear quacking?


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