One feature of the recent economic stimulus package, the American Recovery and Reinvestment Act of 2009, that has garnered a great deal of attention is the first time home buyer credit. This credit is actually a revision of a similar tax credit that was introduced in 2008. While there are many similarities between the two tax credits there are very significant differences as well.
Similarities
As the name suggests, both the 2008 and 2009 tax credits are for first time home buyers. For purposes of this credit anyone who did not own a home in the previous three years qualifies as a first time home buyer. The home purchased must be a single family residence and must be the buyer’s principal residence. In both instances the credit can reduce, or better yet even eliminate, the amount of tax liability.
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The best part about these credits is that they are refundable, meaning that if the credit is more than the filer’s tax liability, the remaining unused portion of the credit is refunded to the tax payer. For example, if the taxpayer is eligible for a credit of $7,500 but only owes a total tax of $6,500, the remaining $1,000 is given to the taxpayer. See, taxes really can be fun!
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Of course, there are always some not so fun parts about taxes, such as the income limits. To be eligible for the full credit an individual must have an adjusted gross income (AGI) of no more than $75,000 ($150,000 for a joint return). The credit is phased out above that level up to an AGI of $95,000 ($170,000 for a joint return).
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Differences
The primary difference between the two credits involves the applicable time frames. The tax credit enacted last year is for homes purchased on or after April 9, 2008, whereas the new tax credit is available for homes purchased from January 1, 2009 through November 30, 2009. Note that the new credit will not include homes purchased in December of 2009, possibly for no other reason than to maintain the long-standing tax law tradition that nothing be as simple as it seems. Another strange but nice quirk of the 2009 law is that, the credit can actually be claimed on the taxpayer’s 2008 tax return, assuming the purchase occurs in time to include it on the 2008 return.
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Another key aspect of the 2008 credit is that it actually acts like an interest free loan, as it is repaid over fifteen years beginning with the 2010 tax filing. In the event that the home is sold before the fifteen years is up, the amount of credit yet to be repaid is then due. The new 2009 credit, on the other hand, never has to be repaid unless the home is sold within three years, at which time the entire credit will be recaptured.
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In both cases, the credit is ten percent of the cost of the home up to a maximum credit amount. For the 2008 credit the maximum credit is $7,500 but for 2009 the maximum was raised to $8,000.
In addition, homes financed through the proceeds of tax-exempt mortgage revenue bonds were not eligible for the 2008 credit. That restriction was lifted for the 2009 credit.
Newer is Better
The newly enacted American Recovery and Reinvestment Act clearly provides better tax advantages than the previous first time home buyer credit. Unfortunately for those who purchased their home in 2008, they are subject to more restrictions and will repay the credit. For those who have purchased, or are considering purchasing, a home in 2009, however, the new law gives not only excellent tax incentives, but also the advantage of knowing in advance what tax breaks they can expect and the window within which they have to make their purchase in order to qualify.
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First time home buyers taking advantage of one of the tax credits may want to invest the money. Investors considering stock investing should consider using stock options to protect their investments. A put option can be considered “stock insurance“. A put option provides a limit on how much can be lost for a stock investing position.
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[tags] American Recovery and Reinvestment Act of 2009, home buyer, first time home buyers, mortgage revenue bonds [/tags]