Cover story: First-time homebuyer tax credits

First-time homebuyers are in a great position to buy a home this year since they do not have to sell one before moving. Lower home prices, plenty of homes on the market and low interest rates are other factors favorable to homebuyers - as long as they have secure jobs, decent credit and some savings for a down payment and closing costs. In addition, a first-time homebuyer tax credit is providing an extra incentive for buyers to purchase homes now.

Two first-time homebuyer tax credits are currently in place. In 2008, President Bush signed into law a first-time homebuyers tax credit of $7,500. As part of the economic stimulus package, President Obama has signed into law a first-time homebuyers tax credit of $8,000. Homebuyers need to understand that they cannot take advantage of both tax credits and that they cannot choose which one they use. These tax credits have strict rules, which are defined by the date of the home purchase.

Internal Revenue Service (IRS) rules state that first-time homebuyers (defined by the federal government as anyone who has not owned a home within the previous three tax years) who purchased their primary residence between April 8 and Dec. 31, 2008, are only eligible for the $7,500 tax credit. First-time homebuyers who purchase a home this year between Jan. 1 and Dec. 1 are only eligible for the $8,000 tax credit.

There are several differences between the two tax credits, but they both require that the buyers live in the home. In other words, the credit is not available to investors.

Here are the rules for the 2008 first-time homebuyers tax credit:

• Tax credit is $7,500 or 10 percent of the purchase price of the home (whichever is smaller).

• It applies only to first-time homebuyers, defined as those who have not owned a home within the previous three tax years.

• Must be repaid over 15 years in 15 equal installments; in other words, this functions more as an interest-free loan. Repayment begins two years after the year the credit is claimed. If the tax credit is claimed on the 2008 taxes, repayment begins with the 2010 tax return.

• The tax credit is restricted to individuals with a modified adjusted gross income of $95,000 or less or $170,000 or less for married couples filing jointly. The tax credit phases out for individuals with a modified adjusted gross income between $75,000 and $95,000; and for married couples filing jointly with a modified adjusted gross income between $150,000 and $170,000.

• Residents in the District who are (or were) eligible to claim the D.C. first-time homebuyer tax credit cannot claim the federal tax credit. (Note: This does not apply for homes purchased this year that are eligible for the 2009 tax credit.)

See IRS Form 5405 for complete instructions.

Here are the rules for the 2009 first-time homebuyers tax credit:

• Tax credit is $8,000 or 10 percent of the purchase price of the home (whichever is smaller).

• It does not have to be repaid unless the home is sold within three years. If you sell the home within 36 months of the purchase date, you have to pay back the full amount of your tax credit.

• Applies only to first-time homebuyers, which are defined as those who have not owned a home within the previous three tax years.

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