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Making It Pay to Make the Leap From Renter to Owner

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By Benny L. Kass
Saturday, March 28, 2009

Did you buy a home last year? Are you planning to buy one now that interest rates are so low? Are you a first-time buyer? Did you buy in the District?

If the answer to any of those questions is yes, you might be able to take advantage of first-time-buyer federal tax incentives. In the hope of stimulating the economy, Congress has enacted three tax-credit laws to encourage renters to become homeowners.

Here's a summary:

-- You bought in 2008: If you settled on a home between April 9 and Dec. 31, 2008 -- and if the home is not in the District -- you are eligible for a credit of up to $7,500. This is available to first-time buyers only. Under this law, a first-time buyer is defined as someone who has not owned a principal residence within three years before taking title to the new home.

Single taxpayers with incomes up to $75,000 ($150,000 for married couples) qualify for the full tax credit. As income rises, the credit phases out. It disappears when your income reaches $95,000 ($170,000 for married couples).

This is not a true tax credit. It is an interest-free loan from the government. Two years after settlement, you have to start paying the money back in installments over 15 years. The payment is included in your annual income tax returns. If you sell the home before the 15 years are up, in most situations you will have to pay back the loan, called a "recapture" in tax language.

To take advantage of this "credit/loan," include Form 5405 when you file your income tax return for 2008. This and all other tax forms are available on the Internal Revenue Service Web site, http://www.irs.gov.

-- You bought or plan to buy in 2009: The economic stimulus law that went into effect Feb. 17 increases the credit to $8,000, and eliminates the recapture requirement.

If you purchase a home between Jan. 1 and Dec. 1, 2009 -- and you or your spouse did not own a home during the three years before settlement -- you can claim a credit of up to $8,000. The same income limitations described above apply here.

You do not have to pay the IRS anything if, and only if, the home continues to be your principal residence for three years.


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