Confusing credits for homebuyers

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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NEW YORK (Money) -- Question: I purchased a home last December and qualified for a $7,500 first-time homebuyer's tax credit that I must repay. But I now see that the stimulus package is offering an $8,000 first-time homebuyer credit for purchases from January 1 through November 30, 2009 that doesn't have to be repaid. Will I still have to pay back the $7,500 even though I bought my house just two weeks before the beginning of this year? This sort of timing would be just my luck. --Jeremy, West Lafayette, Indiana

Answer: I wouldn't go so far as to say you got hosed, Jeremy. But you would have been much better off had you bought your home just a couple of weeks later, although, of course, you had know way of knowing it at the time.

The $7,500 tax credit that qualifying first-time homebuyers who bought after April 8, 2008 but before January 1, 2009 are eligible to take when they file their 2008 taxes is part of the Housing and Economic Recovery Act of 2008, a piece of legislation that was enacted last summer to address the housing crisis.

Actually, it's not so much a tax credit as an interest-free government loan because you've got to repay it. You don't have to begin making payments until 2010 and you can be spread out the payments over 15 years. Essentially, you would pay an additional $500 in tax each of those years.

If you stop using the home as a principal residence or sell it, all the payments become due on the tax return for the year that happens (although there are a few exceptions). The credit also has a number of other little conditions and twists.

The $8,000 first-time homebuyer's credit that's in the stimulus package (or, to be more precise, The American Recovery and Reinvestment Act of 2009) also requires you to jump through a number of hurdles and hoops to qualify for it. But if you do, it's a much more lucrative benefit for a number of reasons.

It's bigger -- $8,000 vs. $7,500. It's a real tax credit, not a loan. You don't have to repay it as long as you remain in your home for at least 36 months after the purchase date (although even if you run afoul of this provision, there are still exceptions to the repayment rule).

And the $8,000 credit has another significant advantage: Even though you must purchase the house between January 1 and November 30 of this year, the IRS recently announced that you can claim the credit on your 2008 tax return if you wish. So you don't even have to wait until you file your 2009 taxes to take advantage of it.

I sense from the way you phrase your question that you're hoping that maybe, just maybe, there's a way for you to get the more desirable $8,000 credit, if for no other reason than you bought so tantalizingly close to January 1 of this year.

Alas, you can't. The IRS announcement I mentioned earlier specifically says that the new $8,000 credit doesn't apply to first-time homebuyers "who purchased a home after April 8, 2008, and on or before Dec. 31, 2008." So you're pretty much stuck with the $7,500 tax credit-that's-really-an-interest-free-loan, unless a law is passed that allows you to take the $8,000 credit. And Mark Luscombe, one of the resident tax gurus at CCH, told me he doesn't expect that to happen.

I should add, though, that while I sympathize with you for the somewhat unfortunate timing of your home purchase, you are still getting a break. Even in these days of billion-dollar bailouts, a 15-year interest-free loan is worth something. And it's certainly better than no break at all.

Which is what a lot of other recent first-time buyers are getting -- zip. For example, first-timers who bought their homes on or before April 8, 2008 got in too early for even the $7,500 credit. And even if they bought within Congress's approved time frames, single first-time homebuyers with modified adjusted gross income over $95,000 as well as married couples making $170,000 or more don't qualify for a cent of either credit, as their incomes make them ineligible.

You can argue about whether all this is fair or unfair, whether the time periods make sense or seem plucked out of the air. (I'm sure Congress had perfectly good reasons for making the beginning date on the $7,500 April 8th, as opposed to April 7th or January 1st, and for making the cutoff date on the $8,000 credit November 30 rather than the end of the year.)

But, for better or worse, these are the kind of issues that arise when you've got a system where legislators target tax-credits and other goodies to very specific groups they deem worthy. Some people end up winners, some losers -- and when Congress changes the rules, people who felt like winners one day may not feel that way the next.

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