What is the First Time Home Buyer Tax Credit?

The first-time homebuyer tax credit is a part of The Worker, Homeownership, and Business Assistance Act of 2009. The Act  also provides an $8000 tax credit for individuals purchasing a principal residence for the first time. This federally mandated program was designed to give incentives to homebuyer in an effort to stabilize the housing market, which has undergone significant turmoil as a part of the financial crisis that began in 2008. There are very specific terms by which an individual can qualify for this program.

Qualifying for the Tax Credit

Under the terms of the program, a first-time homebuyer is defined as an individual who has not owned a principal residence for the past three years, and who purchases a home between January 1, 2009 and April 30, 2010.

 The law looks to the ownership status of each spouse individually, when considering a married couple; in essence, if either spouse has owned a principal residence in the last three years, neither spouse can qualify for the tax credit.

Once an individual qualifies for, applies for, and is granted the tax credit, that individual or couple is allowed to reduce their tax liability on a dollar-for-dollar basis by $8000. Because the tax credit is refundable, if the total tax liability of the individual is less than $8000, the difference may be received in the form of a refund. Additionally, there are other means by which an individual may accelerate the benefits of the tax credit, including reducing their federal income tax withholdings from their paychecks.

Drawbacks of the Program

Despite all of these advantages, there are additional details and criteria that must be understood and met to qualify for the tax credit. The most notable of these is the income cap. Individuals who earn more than $125,000 and couples who earn in excess of $225,000 do not qualify for the tax credit.

These individuals may qualify for a portion of the tax credit based on what the IRS calls Modified Adjusted Gross Income (MAGI). This number can be complicated to arrive at, and it is advisable to consult a tax professional to assure that errors are not made. The other significant requirement that must be observed is that the home being purchased must be used as the principal residence and it may not have a sale price in excess of $800,000.

As long as the home is the primary residence of the purchaser, there are no specifications as to what type of home may qualify – houses, town homes, and apartments are equally acceptable. Given the size of the tax credit, and the fact that the money is no longer required to be repaid in subsequent years, as it was under the original version of the law, the requirements seem minimal when compared to the benefits. While the overall affect that the law will have on the housing market remains uncertain, the immediate affect it can have on an individual’s ability to purchase a new home is significant.