Final score: $8,000 for homebuyers

First-time purchasers get a tax credit windfall
if they buy before December.

By Les Christie, CNNMoney.com staff writer

Last Updated: February 17, 2009: 12:13 PM ET

NEW YORK (CNNMoney.com) -- There's a nice windfall for some homebuyers in the economic stimulus bill awaiting President Obama's signature on Tuesday. First-time buyers can claim a credit worth $8,000 - or 10% of the home's value, whichever is less - on their 2008 or 2009 taxes.

A big plus is that the credit is refundable, meaning tax filers see a refund of the full $8,000 even if their total tax bill - the amount of withholding they paid during the year plus anything extra they had to pony up when they filed their returns - was less than that amount. But there has been a lot of confusion over this provision. Adam Billings of Knoxville, Tenn. wrote to CNNMoney.com asking:

"I will qualify as a first-time home buyer, and I am currently set to get a small tax refund for 2008. Does that mean if I purchased now that I would get an extra $8,000 added on top of my current refund?"

The short answer? Yes, Billings would get back the $8,000 plus what he'd overpaid. The long answer? It depends. Here are three scenarios:

Scenario 1: Your final tax liability is normally $6,000. You've had taxes withheld from every paycheck and at the end of the year you've paid Uncle Sam $6,000. Since you've already paid him all you owe, you get the entire $8,000 tax credit as a refund check.

Scenario 2: Your final tax liability is $6,000, but you've overpaid by $1,000 through your payroll withholding. Normally you would get a $1,000 refund check. In this scenario, you get $9,000, the $8,000 credit plus the $1,000 you overpaid.

Scenario 3: Your final tax liability is $6,000, but you've underpaid through your payroll withholding by $1,000. Normally, you would have to write the IRS a $1,000 check. This time, the first $1,000 of the tax credit pays your bill, and you get the remaining $7,000 as a refund.

To qualify for the credit, the purchase must be made between Jan. 1, 2009 and Nov. 30, 2009. Buyers may not have owned a home for the past three years to qualify as "first time" buyer. They must also live in the house for at least three years, or they will be obligated to pay back the credit.

Additionally, there are income restrictions: To qualify, buyers must make less than $75,000 for singles or $150,000 for couples. (Higher-income buyers may receive a partial credit.)

Applying for the credit will be easy - or at least as easy as doing your income taxes. Just claim it on your return. No other forms or papers have to be filed. Taxpayers who have already completed their returns can file amended returns for 2008 to claim the credit.

Lukewarm reception

The housing industry is somewhat pleased with the result because the stimulus plan improves on the current $7,500 tax credit, which was passed in July and was more of a low-interest loan than an actual credit. But the industry was also disappointed that Congress did not go even further and adopt the Senate's proposal of a $15,000 non-refundable credit for all homebuyers.

"[The Senate version] would have done a lot more to turn around the housing market," said Bernard Markstein, an economist and director of forecasting for the National Association of Homebuilders (NAHB). "We have a lot of reports of people who would be coming off the fence because of it."

Even so, the $8,000 credit will bring an additional 300,000 new homebuyers into the market, according to estimates by Lawrence Yun, chief economist for the National Association of Realtors.

The credit could also create a domino effect, he said, because each first-time homebuyer sale will lead to two more trade-up transactions down the line. "I think there are many homeowners who would be trading-up but they have had no buyers for their own homes," Yun said.

Who won't benefit, according to Mark Goldman, a real estate lecturer at San Diego State University, are those first-time homebuyers struggling to come up with down payments. The credit does not help get them over that hurdle - they still have to close the sale before claiming the bonus.

One state, Missouri, is trying to get around that problem by creating a short-term loan on the tax credit of up to $6,750. The state would loan borrowers the money so they could use it at closing as part of the downpayment. Then, when the buyers receive their tax credit from the IRS, they pay back the state. Other states may follow with similar programs, according to NAHB's Dietz.

Many may look at the tax credit as a discount on the home price, according to Yun. A $100,000 purchase effectively becomes a $92,000 one. That can reassure buyers apprehensive about purchasing and then watching prices continue falling, he added.

And it provides a nice nest egg for the often-difficult early years of homeownership, when unexpected repairs and expenses often crop up. Recipients could also use the money to buy new stuff for their home - a lawnmower, a rug, a sofa - and, in that way, help stimulate the economy.

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Housing industry welcomes homebuyer tax cred

By ALAN ZIBEL – 4 days ago

For Gail Robinson, a real estate agent in Connecticut who has seen her business limp along since the stock market plummeted last year, it was the best news in ages.

With Congress considering a new tax credit intended to turn around the battered housing market, she hopes lawmakers have found the long-awaited silver bullet. She was busy Thursday sending out about 200 e-mails to potential clients about federal plans to give buyers a subsidy of up to $15,000 for all home purchases.

"My whole firm is excited about it," Robinson said. "It could bring in a whole new set of buyers."

The new credit, approved by the Senate Wednesday night, works like this: Buyers would get 10 percent of the purchase price of any home, up to $15,000, applied to their tax bill.

Consumers would be allowed to spread out the credit over two years, making it possible for those who pay less than $15,000 in taxes to benefit. Anyone who buys a home within a year of the bill's signature would qualify. To deter speculators, buyers must occupy the house as their main residence for at least two years.

But the tax incentive is likely to be more helpful to buyers in less expensive markets, said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. "Unfortunately, in the places that are most hard-hit, like California, it's going to have less of an impact," he said.

Sen. Johnny Isakson, a Georgia Republican and former real estate agent, introduced the new tax credit as an addition to President Barack Obama's economic stimulus package. It's modeled after a similar measure in the mid-1970s.

The tax credit's cost was originally estimated at about $19 billion, but a revised estimate requested by Sen. Charles Schumer, D-N.Y., raised the projected to nearly $36 billion.

A tax break passed last summer provides a $7,500 credit to first-time homebuyers. But that must be repaid over 15 years, and the impact on home sales has been negligible.

Homebuilders and Realtors argue that dramatic steps are needed to boost the shellshocked housing market. While sales of existing homes rose unexpectedly in December, prices are still falling rapidly. The nationwide median sales price plunged to $175,400 in December, down 15.3 percent from $207,000 a year ago, and the lowest since May 2003. Sales of new homes, meanwhile, fell in December to the slowest pace on records dating to 1963.

Lawmakers, at least in the Senate, appear to be falling in line, even as moderates from both political parties worked Thursday to trim as much as $100 billion from the stimulus legislation and clear the way for its passage as soon as Friday.

With the economy showing fresh signs of weakness Thursday, Obama said: "The time for talk is over. The time for action is now."

But lawmakers faced criticism about aiding homebuyers — and not renters or those made homeless — as the recession worsens.

Sheila Crowley, president of the National Low Income Housing Coalition, questioned the decision to subsidize home purchases when housing prices still remain out of the reach for much of the working class.

"Why would we do something like this now?" Crowley said. "Really, only well-off people are in a position to buy a house."

Buyers will still face tight lending standards, and mortgage rates have climbed since hitting a record low of 4.96 percent last month. The average rate on a 30-year fixed mortgage rose to 5.25 percent this week from 5.1 percent last week, mortgage finance company Freddie Mac said Thursday.

Still, the mood was ebullient at the National Association of Realtors' headquarters in Washington.

"I'm thrilled. It's almost like you asked for the stars and you hit the moon," Charles McMillan, a Texas-based Realtor and the group's president, told reporters. "This is going to be great for the American homebuyer."

Jerry Howard, chief executive of the National Association of Home Builders, which lobbied hard for the tax credit, said it "will put the floor on the downward spiral" in home prices.

Real estate lobbyists are still pressing the government to spend billions to temporarily subsidize lower mortgage rates. They were looking optimistically to Treasury Secretary Timothy Geithner's planned announcement Monday of a new effort to prop up the banking industry and prevent foreclosures.

Mark Zandi, chief economist with Moody's Economy.com, said the homebuyers' tax credit will help reduce a giant pileup of unsold homes that is wreaking havoc on the financial system and broader economy. Since the credit is temporary, it also should help break "the psychology pervading the housing market that it is best to wait to buy a home because its price will soon be lower," Zandi wrote in an e-mail.

By itself, the tax credit won't help prod reluctant buyers off the fence, said real estate broker James Joseph of Whittier, Calif., but it could prove to be the tipping point if combined with other incentives like government subsidies for lower mortgage rates.

"It's one more coin on the scale," he said. "Every bit helps."

Robinson was hoping the potential tax credit could boost attendance this weekend at an open house she's holding at a renovated property with an ocean view. She says it's a steal at $285,000.

Associated Press Writers Daniel Wagner and David Espo in Washington, and Alex Veiga in Los Angeles contributed to this report.

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