$7500 Tax Credit

As a first time home buyer I was looking at the mortgage rescue bill signed by President Bush in August and I came across the $7500 tax credit. I had heard about this $7500 government loan, but I didn't really understand it until now. Like all tax code it is somewhat tricky and could lead to some pitfalls.

Here's what it entails. A first time home buyer who closes on a home between April 9, 2008 and July 1, 2009 is eligible for a tax "credit" of 10% of the purchase price up to a maximum of $7500. The catch is that the credit is not applied at the time of the purchase, it is claimed when your taxes are filed, therefore not helping with closing costs or a down payment as was the intent. The other caveat is that this isn't a $7500 credit at all. In actuality it is an interest free loan that the borrower will begin repaying 2 years after the original claim in the form of $500 in income taxes for the next 15 years. The loan is to be repaid in full upon sale of the house if any capital gain is realized. If you do not realize a profit on the sale of your house the loan is forgiven (forgiven on death as well).

In the end I am looking forward to getting this massive tax return this year as it has no downside for us as long as it is managed correctly. We will most likely take the $7500, sock it into an interest bearing account and leave it be for the next 3 years until we sell our house. At which time we will pay back whatever is left on the loan (assuming we make a profit on the sale of our house).

As always I feel a need to point out the pitfalls of the bill. First, just like anything else in tax code the loan is reduced for higher wage earners and disappears altogether at $95000 for singles and $170000 for married (have I written about how much I love Robin Hoodenomics?). The real problem lies in the way the loan is packaged. I think the majority of Americans who are eligible for this benefit will take it and they will find themselves with an extra $7500 in their tax return. The money will be spent without reading the fine print and the individuals will then be stuck with an extra $500 bill on their taxes for the next 15 years.

Once again the greatest beneficiary of this bill is the tax accountant. Maybe I should take a sabatical and let Melissa go back to work.