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By Mary Umberger

RISMEDIA, January 6, 2009-(MCT)-Last summer, the federal government threw first-time home buyers a big bone-an income-tax credit for buying a place to live.

This isn’t like a tax deduction: A tax credit can have even more impact on your finances than a deduction because it allows you to directly reduce the amount you owe Uncle Sam-in this case, up to $7,500.

But like all tax rules, it’s slightly complicated-for one thing, you must pay it back. And for another, it’s temporary-you’ll have to close on your home purchase by July to take advantage of it.

We talked with Robert Dietz, tax economist for the National Association of Home Builders in Washington, who said many first-time buyers seem to be aware of the credit, but they’re skittish about the repayment feature.

“We’re trying to get the fence-sitters into the market,” he said. “But the impact of (the credit) so far, at least in terms of sales data, has been disappointing.”

Here are five things to know about the credit:

1. Congress created it because it perceived that incentives to make first-time buyers enter the market are critical to priming the housing pump. First-timers are less-encumbered buyers than those who don’t have an existing home to sell-and once they buy, it usually sets off a chain of other move-up purchases.

2. To get the credit, you must be a first-time home buyer, but the government defines that somewhat generously: You cannot have owned a home in the past three years. The home must be your principal residence (no vacation homes) and have been purchased-that is, closed on-between April 9, 2008 and July 1, 2009.

3. Although it’s been promoted widely as “a $7,500 tax credit,” it’s not as cut-and-dried as that. The credit is equal to 10% of the purchase price of the house, up to $7,500-and given the price of real estate, most purchases will more than qualify. But there are income limits: Single taxpayers with modified adjusted gross income (MAGI), which is income that’s been adjusted for various tax considerations) up to $75,000 and couples with MAGI up to $150,000 will qualify for the full credit. If your MAGI is higher, you still may be entitled to partial credit; if it’s above $95,000 for singles and $170,000 for couples, you can’t claim the credit at all.

If the amount of tax you owe is less than the amount of the credit, you will get to keep the difference, in the form of a refund from the IRS.

4. Are you still with us after all that? Probably the most important aspect of the tax credit is that it really isn’t a “credit” at all-it’s more like a loan. You’ll have to pay the feds back.

But before you say, aw, shucks, keep in mind that it’s essentially an interest-free loan. You’ll have to start repaying it in two years, in increments of about $500 over a 15-year period if you’ve received the full credit.

If you sell the home before the credit is repaid, the balance will be due immediately-and theoretically, you’ll sell the house for a profit, so that repayment should be straightforward. But given the times we live in, if the house is sold for a loss, the outstanding balance is forgiven.

The NAHB’s Dietz said, though, that getting the financial incentive after the closing “creates a chicken-and-egg problem for buyers who are having difficulty accumulating a down payment.”

The National Association of Realtors has advised potential buyers that they might get some benefit from the tax credit up-front if, as they begin their house-hunt, they adjust the amount withheld from their salaries for taxes, bank it, and apply it toward the down payment, with the presumption that the tax credit will create a favorable financial swap.

“Adjusting your withholding is an option, but you’d have to be very, very careful about it,” Dietz said. “I wouldn’t recommend it necessarily. People would have to talk to a tax professional about that.”

5. You will claim the credit on a new IRS form, 5405. In addition to all the whys and wherefores mentioned here, there are other exclusions and tax minutiae-so, as these articles always say, consult a tax professional. But in the meantime, detailed information is available from, a Q&A site managed by the NAHB.

The federal government, too, has information, though it’s harder to retrieve, and the specific Web address is about a mile long. One way to access it is to go to and click on Newsroom at the bottom of the home page; then click on News Releases, then News Release Archive (from September), where you’ll come to a governmental summary of the law.

You were expecting the IRS to make it simple?

© 2008, Chicago Tribune.
Distributed by McClatchy-Tribune Information Services.