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Unwrapped, Housing Tax 'Credit' Is Really a Loan

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Thursday, July 31, 2008; Page D02

There's been a lot of discussion about how much the new housing bill passed by Congress will help individuals facing foreclosure.

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Some will be able to keep their homes, to be sure. But there's a different provision of the Housing and Economic Recovery Act that I want to focus on -- the much-trumpeted tax credit for first-time homebuyers.

A tax credit is much more valuable than a deduction. A credit reduces dollar for dollar the amount of tax you owe. A deduction merely reduces the amount of your income that is taxable.

Under the new law, certain homeowners will be eligible for a tax credit equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. The credit is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.

When I saw the $7,500 amount, I thought, not a bad tax credit. But there are all kinds of catches.

Before you rush to take advantage of this, be aware it's a loan cloaked as a credit.

"Essentially this is a loan administered through the tax code," said Gerald Prante, an economist with the nonprofit Tax Foundation. "I question whether the tax code is the best way to do this."

Financially, the loan has about the best rate and term you can get. It's interest-free. Homebuyers would be required to repay the government over 15 years in equal installments for any amount received.

So let's say you qualify for the maximum credit of $7,500. Considering the price of housing, just about every first-time buyer would qualify. The terms would mean a yearly loan payment of $500 for 15 years, or about $41.67 a month.

You have to begin repaying the credit in the second tax year after you purchase the home. If you sell the house before you pay off the credit, the entire amount becomes immediately due. However, if you sell and the gain is less than the credit, then you only have to repay up to the amount of the gain. If the homeowner dies before the credit/loan is repaid, any outstanding amount is forgiven.

The new law defines a first-time homeowner as an individual who has had no ownership interest in a principal residence for a three-year period ending on the date of the current home purchase.

Also, there's a small window to this opportunity. The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009.


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