It didn’t take long for Congress to tinker with the “first-time homebuyer tax credit.” This tax break, created by the housing law enacted last year, has been enhanced by the new economic recovery law. But major limitations still exist.

2008 home purchase: The housing law authorizes a refundable credit for first-time homebuyers equal to the lesser of $7,500 or 10% of the price of a principal residence purchased after April 8, 2008, and before January 1, 2009. A “first-time homebuyer” is defined as someone who has not owned a principal residence for three years prior to the purchase.

But the housing law requires taxpayers to repay the 2008 credit to the IRS over a 15-year period beginning with the 2010 tax year. Thus, it resembles an interest-free loan more than a typical tax credit. If you stop using the home as your principal residence, you must repay the full amount.

Furthermore, the credit begins to phase out if your modified adjusted gross income (MAGI) exceeds $75,000 for single filers and $150,000 for joint filers. It disappears when MAGI reaches $95,000 for single filers and $170,000 for joint filers. The 2008 credit can be claimed only on a 2008 tax return.

2009 home purchase: For home purchases in 2009 before December 1, the new recovery law increases the maximum credit to $8,000. It also eliminates the requirement to repay the credit if you live in the home for at least three years following the purchase. However, you must recapture the entire credit if you stop using the home as your principal residence during this period. Finally, you still have to contend with the income phase-out rules. The 2009 credit can be claimed on either your 2008 or your 2009 tax return. Other special rules may apply to the homebuyer credit.



David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.