Part of the current stimulus bill that is about to be signed by President Obama includes an $8,000 housing tax credit. There are a many misconceptions about the tax credit that need to be clarified. This is what we know for sure about the bill in its present form. Let's start with the good parts:
- the credit is not limited to first time homebuyers, nor is there an income limit
- it is a tax CREDIT, as opposed to a tax deduction. A tax deduction is something that reduces your taxable income. Think mortgage interest deduction or daycare expenses. A tax credit reduces your tax liability. So, for example, if your total tax liability is $6000, you could take $6000 of the $8000 credit and take the remaining $2000 in the following year. This tax credit is also independent of your tax withholding. So if your tax liability is $6000 and you withheld $7,000 throughout the year, normally you would get a tax refund of $1000. But if you purchased a home within the specified time period and used the credit, your tax refund would be $7,000 because you could use $7000 of the $8000 credit!
- you can take the credit on your 2008 taxes even if you purchased the home in 2009
- the tax credit does not have to be repaid
Now let's talk about what the bill does NOT do (the "bad" parts, you might say):
- the bill does not give you money you don't have to buy a house. This is perhaps the biggest misconception about the tax credit. I hear people all the time, who don't have enough money for a down payment say they want to use the $8,000 credit to buy a home! If you don't have the minimum required down payment to buy a home, you still won't be able to buy a home. All this credit does is replenish the money you used for the down payment
- since the credit is only a reduction to your tax liability, by definition the credit will not help people who don't have a tax liability. If, for whatever reason, you don't pay taxes, you will not be eligible for the credit.
- The bill does nothing to address the tightened lending requirements currently enforced by lenders. This bill will not help you qualify for a home that you do not currently qualify for.
- The credit does not apply to refinances.
- You cannot use it to buy a second home.
- You have to pay back the credit if you sell the house within two years. Not a big deal for most people, but it will prevent "flippers" from using the credit.
I hope this clears some of the confusion about the proposed tax credit. Please visit my Austin Texas Real Estate website at http://www.RomeoM.com for more real estate information.