The new housing-relief bill will give some people an opportunity to hit a tax trifecta.
Homeowners already enjoyed the ability to deduct mortgage interest and property taxes. They also have an opportunity to exclude capital-gains tax on most if not all profits on a primary residence.
Now there's a new credit or dollar-for-dollar tax reduction for "first-time" homebuyers a valuable break that will help a lot of people get in the door.
The homebuyer tax credit is a big part of the housing-relief legislation passed by Congress and signed by President Bush. At an estimated cost of $4.8 billion over 10 years, it amounts to nearly one-third of the $15.1 billion in total incentives.
Already, real-estate groups are praising the legislation, which also strives to help imperiled borrowers refinance into government-backed mortgages, shore up Fannie Mae and Freddie Mac and more.
"This is the most important housing bill in a generation," said Kieran Quinn, chairman of the Mortgage Bankers Association. "The tax incentives will encourage potential buyers to get off the sidelines and help stabilize home prices."
Still, the devil is in the details, and there are a lot of details involving the tax credit. Phoenix tax attorney Bob Kamman describes the credit as "the most complicated tax incentive I can remember."
In short, there are some weird definitions and other not-so-obvious nuances.
For example, the credit applies to "first-time" homebuyers, but in truth you can qualify even if you have owned other dwellings before.
According to tax researcher CCH Inc. in suburban Chicago, the legislation defines first-time buyers as anyone who has had "no ownership interest in a principal residence during the three-year period" before a home was bought.
Among other things, this allows renters who own a vacation home to qualify with the purchase of a primary residence, notes CCH in a report.
But higher-income people aren't eligible for the tax credit, which is worth the smaller of $7,500 or 10 percent of a home's purchase price.
The credit starts to phase out for married couples with income over $150,000 and ends completely above $170,000. For singles, the phase-out range is $75,000 to $95,000.
Another interesting twist is that two or more unmarried people can buy a home and share the credit.
You can't use the credit to help finance a home at the time you close on a transaction. Instead, you claim the credit later, when filing your 2008 or 2009 tax return. The credit applies to homes bought between April 9, 2008, and June 30, 2009.
Still, it will provide help for buyers struggling to handle expenses in the early going.
"People (often) don't get much help on their tax returns in the year they purchase a home, because they have deductible interest and taxes for only part of a year, and they might not even qualify to itemize," said Mark Luscombe, a principal tax analyst for CCH.
The credit is refundable, so it will help even those people with little or no tax liability.
But there's a big drawback: The credit eventually has to be repaid, although you have 15 years to do it. This feature basically makes it an interest-free loan from Uncle Sam, payable in $500 annual installments.
If you sell, move out or otherwise stop using the home as your primary residence, you'll need to repay any remaining credit balance in the same year.
"Someone thinking of buying a house, taking the credit and renting out the house in a couple years after moving to a new principal residence...shouldn't," said Kamman.
There's also a provision that would bar you from taking the credit if you sell or otherwise dispose of a home during the same year you apply for the credit. Nor is the tax break available to nonresident aliens.
In short, repayable credits aren't as good as straight credits, but they're certainly attractive to buyers who can qualify and sort everything out.
Once again, the government is dangling incentives to get people into homes, offering just about everything but the kitchen sink.