$8000 First Time Home Buyer Tax Credit, Five Common Myths
By Heidi White, Realtor with Prudential California Realty, Coronado, CA.heidifwhite@gmail.com
Everyone in the Real Estate business that hasn’t had their head in the sand during the first 100 days of the Obama administration is basically aware of the key elements of the new First-Time Home Buyer Tax Credit as modified in the American Recovery and Reinvestment Act of February 2009.
Most Realtors, Mortgage Brokers, and clients I speak to understand that the new law changes the 2008 credit from a $7500 tax credit which has to be repaid within 15 years, to an $8000 tax credit that doesn’t have to be repaid.* Most people I speak with also understand that at one point there was an effort by the NAR and other groups to make the credit $15,000 and to allow it to apply to anyone buying a principle residence and not just first time home buyers. But beyond this basic understanding, there are some serious myths or misconceptions that I believe we as Realtors need to make sure we address to our clients.
Myth #1 – It’s only for first time home buyers and a first time home buyer is someone who’s never bought a house before.
Not so! Despite what common logic would dictate as the definition for “first-time” the fact is that most consumers and many Realtors and Mortgage professionals, do not realize that the definition of First Time Homebuyer in the eyes of the FHA does not mean you’ve neverbought a house before.
In fact, it’s very possible for someone to have bought a house before and still qualify as a first time home buyer. I’m neither a CPA, an attorney, or even a mortgage expert, so I suggest you read the FHA guidelines for yourself at http://www.hud.gov/offices/hsg/sfh/ref/sfhp3-02.cfm, to draw your own conclusions.
Here’s my interpretation.
You could be considered a ‘first time homebuyer’ today if:
- It’s been 3 years or more since you last owned a house.
- You’re a single parent now and only owned with a former spouse while married (I think former spouse means you are now divorced.)
- You’re a displaced homemaker now and you only owned before with a spouse (this one seems to imply that a divorce isn’t as important as being displaced – whatever that means)*
- You owned a principal residence that was not permanently affixed to a permanent foundation (Probably has to do with certain types of mobile homes, house boats or other weird modes of real property)
- You owned a house that got condemned (or should have) and couldn’t be repaired for less then replacement costs (maybe this helps victims of fire, flood, disaster?)
So, if it’s been a while since you owned a home, or if you’ve changed you’re marital status since you last owned that last house, or if you no longer live with the spouse you bought a house with only a year ago, you may currently qualify to be a first time homebuyer again and thus qualify for this tax credit. Many people might just decide they don’t qualify as a first time home buyer when in fact they do. It’s our job as Realtors to make our buyers and potential buyers aware of these rather limited restrictions.
Myth #2 – Every first time home buyer who buys in 2009 gets the full $8000 tax credit.
Not so. First of all, there’s the income test. If you make over $75,000 individually or if you file jointly having a combined gross income over $150,000 you won’t qualify for the full $8000. The amount you qualify for phases out above those caps ($95,000 and $170,000.)
Secondly, the law states that the tax credit will be “the lesser of 10% of the purchase price or $8000…” so, if you buy a house for $60,000, you’ll only qualify for a maximum $6000 tax credit, not $8000.
Myth #3 – The tax credit will help me qualify for the loan (or less commonly misunderstood: the $8000 will be available to help purchase the property.)
OK, maybe this isn’t a common misconception, but some people might be confused about this aspect. The money is a one time tax credit. It’s not an upfront payment from the government. However, because you can purchase a house today and apply for the tax credit tomorrow to offset your 2008 taxes, it’s possible to get you’re money relatively quick. Here’s a copy of the IRS Form 5405 for 2008 Taxes: http://docs.google.com/gview?a=v&attid=0.1&thid=11fb0b4dc66474b6&mt=application%2Fpdf&pli=1)
Myth #4 – I have until the end of 2009 to close on a house if I want to take advantage of this tax credit.
No you don’t! Actually, you must complete your purchase (or close and record- most likely)before December 1, 2009. This is an interesting tidbit to be aware of, since it isn’t regularly discussed. What’s likely to happen, in my opinion, is that many people who are currentlythinking about buying in 2009 will procrastinate and put off beginning their search until sometime later this year. By then, this delusion of ‘all of 2009’ will be shattered and they’ll join a rush of people in later summer and early September trying to get the property they want into escrow before the end of October.
I anticipate a mad rush to buy between August and September this year and have scheduled my vacation for early June! I also think that this could create a temporarily price inflation caused by bidding wars on the most desired properties and leave some buyers wishing they had started the process sooner.
Myth #5 – Unlike the 2008 plan, I never have to pay this tax credit back.
Not necessarily so. There is a recapture provision. If home is sold within 3 years of purchase, the entire amount of credit is recaptured on sale. Still, it’s a heck of a lot better than the last years’ plan which requires recapture of any not-paid-back-amount of the $7500 repayable tax credit, if the home was sold within 15 years of being purchased. It doesn’t seem fair that the people who took advantage of this deal last year are stuck with paying back $7500, and those who dragged their feet get the benefit of ‘free money.’
So, What Does All This Mean for the Housing Market?
People ask me all the time if I think property values will go up or down in the next six months. My answer always begins with the same line, “I don’t know, I don’t have a crystal ball.” And then I talk about how all real estate is local and sometimes illustrate this by showing completely unique and sometimes contradictory housing market trends in different service areas in San Diego County over the same period of time.
Othertimes, I’ll share my ‘gut’ feelings about what may be happening in the market, assuming I have one at the time.
But I always make it clear to my friends and clients that “I do not know anything for certain. How can I? I’m not God.”
So many experts and non-experts alike have belittled the probable effectiveness of this second stab at housing market stimulation. Many of my cohorts believe that this $8000 First Time Home Buyer Tax Credit will not have a significant impact in bringing buyers to the table, especially in the higher priced markets - because it’s too little, too late.
At this moment in time, my gut and I disagree with that conclusion. Personally, I believe that while this new law won’t be enough to move the non-qualified buyer back into the market, this tax credit may very well be just the right incentive to get many fence sitters off the fenceand out making offers.
I believe there’s a real pent-up demand of people wanting to buy homes. I believe that many of those individuals who really want to own, will get over some of their fears about the economy and whether or not we’ve hit the bottom yet, and will decide to jump on the chance to get something real and certain - such as the once in a lifetime opportunity to have the government essentially gift them $8000 if they buy a house.
Even if prices continue to fall, it might not be a bettter deal for them then to skip taking this tax credit, especially if interest rates rise. So I honestly believe many of these fence sitter will enter the market in 2009.
Whether or not you believe that this $8000 First Time Home Buyer Tax Credit of 2009 will have an impact on our economy and stimulate housing, it’s a good idea if you are a Real Estate professional to make sure you understand the realities of this plan and don’t perpetuate the myths.
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