A First Time Homebuyer Tax Credit that Isn’t

The idea that giving a tax credit to first-time home buyers would enable significant numbers of families to enter the housing market, stimulating a faltering real estate market, was probably a pipe dream from the outset.  In practice, very few people families would receive enough cash through the credit to make buying a home feasible.  In any case, the “credit” is really only an interest-free loan from the IRS which must be repaid, either through increased taxes in subsequent years or from proceeds of the sale of the residence.

The maximum amount of tax “credit” is $7500, based upon 3.7% of the national median home price of $219,000.  However, the Federal Income tax liability for a median-income family of four using only standard deductions ranges from $3000 - $4000.  This puts the credit in perspective as an economic engine for the homebuilding industry.

The Foreclosure Prevention Act of 2008 allows the IRS to recapture the “credit” over 15 years at 6 2/3%, or $500 per year on a $7500 advance. These are favorable terms; however, if the homeowner’s finances deteriorated, he or she would still be committed to paying this amount. The provision for accelerating the remaining principal upon sale of the residence could present additional problems if the home is sold in a declining market.