WHAT IS First-Time Homebuyer Tax Credit
The first-time homebuyer tax credit was a refundable tax credit made available to Americans purchasing their first homes. The first-time homebuyer tax credit originally applied to home purchases made by qualified first-time buyers between April 9, 2008 and July 1, 2009. However, the Obama administration extended the original time frame requiring homeowners to have a signed sales contract until May 1, 2010, and gave them until July 1, 2010, to close the transaction.
Tax Deductions Vs. Tax Credits
BREAKING DOWN First-Time Homebuyer Tax Credit
The first-time homebuyer tax credit went into effect on April 9, 2008 and allowed a tax credit for a certain percentage of the purchase price of a home for a homebuyer who had not owned a home in the previous three years. The original tax credit implemented a credit of 10 percent of the home's purchase price, up to $7,500, which had to be repaid over 15 years in equal installments. However, the expanded version of the tax credit increased the maximum to $8,000 and removed the repayment requirement altogether, as long as the buyer stayed in the home for at least three years. The program ended with homes that were in signed contracts by May 1, 2010 and closed by July 1, 2010.
The first-time homebuyer tax credit only applied to homebuyers with incomes under a set level. When the program began, an individual homebuyer was required to have a modified adjusted gross income (MAGI) or $75,000 to $95,000 and a married couple filing jointly required a MAGI of under $150,000. This limit went up as the program went along and capped out at the end of the program in 2010 with an individual MAGI limit of $125,000 and a joint limit of $225,000.
The first-time homebuyer tax credit was claimed on Internal Revenue Service (IRS) Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.
Intention of the First-Time Homebuyer Tax Credit
The housing bubble of the early 2000s created by dubious mortgage lending practices began to pop in the mid-2000s and by 2008 the housing market was in trouble. The first-time homebuyer tax credit was created as a measure to help stabilize a real estate market in freefall as a result of the subprime mortgage lending crisis. With waves of mortgage defaults and foreclosures, new home buyers were hesitant to enter the market and consumer confidence was at a low. The first-time homebuyer tax credit was a simple incentive that helped offset closing costs and moving costs to get first-time homebuyers into a home without increasing risk to either the homebuyer or the mortgage lender.