How the First-time Homebuyer Tax Credit Worked

The homebuyer tax credit helped millions of people buy a house.
The homebuyer tax credit helped millions of people buy a house.
Mike Watson Images/moodboard/Thinkstock

Back in the pioneer days, settlers drove claim stakes into the ground, parked their oxen and set up camp. Then they started building their houses from log in nearby trees. Now, the homebuying process is fraught with contracts, terminology and the threat of looming mortgages that are often enough to scare potential buyers into remaining renters.

In 2008, former President George W. Bush and the U.S. government introduced the first-time homebuyer credit to encourage people to get off their keisters already and take the first-home plunge, as part of the Housing and Economic Recovery Act of 2008. The credit was launched to revitalize the languishing American housing market, which began an epic free fall in 2006 [sources: Baker, The Economist]. In addition, the entire housing business community felt more than a little pinch, with builders and suppliers losing megabucks with each passing month.

The original tax credit (think of it as version 1.0), was available to first-timers who closed on homes between April 8, 2008, and Jan. 1, 2009. It functioned like an interest-free loan, all of which had to be paid back over a 15-year period by way of the purchaser's federal income tax return. So, for people who received the maximum $7,500 credit, this averaged out to $500 per year, beginning with their 2010 tax returns [source: IRS]. For most people, the credit repayment uses IRS form 5405, "Repayment of the First-time Homebuyer Tax Credit," which is filled out and attached to Form 1040.

President Barack Obama expanded the credit as part of the American Recovery and Reinvestment Act of 2009, but changed it drastically from the original incarnation. First, it became a true credit, meaning that if homeowners followed all the rules they wouldn't have to pay it back ... ever! Score, right? The amount also increased to a potential $8,000 windfall, which enticed many buyers to sign on the dotted line [source: Bell].

This being the government, there were a lot of regulations to be met to take advantage of the credit. We'll examine them in detail on the next page.

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The Deets on the First-time Homebuyer Tax Credit

A real estate agent stands at the door of a house in Silver Spring, Maryland, where she held an open house in 2010 at the height of the homebuyer tax credit buying rush.
A real estate agent stands at the door of a house in Silver Spring, Maryland, where she held an open house in 2010 at the height of the homebuyer tax credit buying rush.
© JONATHAN ERNST/Reuters/Corbis

With the housing bubble bursting and the 2008 recession rearing its ugly head, many would-be homeowners balked at making such a huge financial commitment as buying a residence. However, the First-Time Homebuyer Credit assuaged some of the fear, by assuming a lower financial risk. "The newer homes in the area we wanted to live were out of our price range," explains Christy Cook, who cashed in on the credit in 2009. "We opted to buy an older home, so the tax credit helped us to fix some things that needed attention, which we wouldn't have been able to do otherwise."

The credit was available to first-time homebuyers during the time frame of April 8, 2008 to May 1, 2010, for the purchase of a full-time dwelling only. In other words, no fair buying it and then turning it into a profitable rental or vacation home! Interestingly, if a person purchased the residence and lived there full time, she could then rent out other portions of the home and still be able to receive the credit [source: IRS].

The term "first-time buyer" was relatively flexible, as the credit was up for grabs to those who had never owned a home, or who had not owned a residence in at least three years [source: Manni]. The amount available ranged from 10 percent of the home's purchase price, up to a max of $7,500 or $8,000, depending on year of purchase. So, homebuyers in at least the $75,000/$80,000 price range were able to take full advantage of the perk.

In a twist that pleased many, the U.S. government expanded the credit to long-time homeowners just itching to upgrade to a replacement home. Purchase had to take place after Nov. 6, 2009, for a maximum $6,500 credit [source: IRS]. Long-time homeowners were defined as having owned and used the property as a principal residence for a minimum of five years. That half-decade period had to take place consecutively within the eight years before applying for the credit [source: Bell]. For families or other owners interested in shedding a starter home for something roomier, this credit was just the kick in the pants they needed to start house-hunting, if with a little bit of extra caution.

Limitations of the Homebuyer Tax Credit

Everyone's always looking for the "catch" in a situation that seems too good to be true ... because so many of them are! Surprisingly, the requirements for the tax credit were fairly upfront and easy to understand, especially once the 2008 interest-free loan "credit" and all its repayment requirements was swapped for the actual credit of 2009.

Provided a person qualified as a first-time homebuyer or a long-time homeowner, there were a few basic regulations that had to be followed. Pretty much any type of principal residence could be purchased, as long as it could be affixed to land. So, single-family houses, townhomes, apartments, duplexes, mobile homes and even travel trailers (so long as they were affixed) qualified. RVs, however, were considered personal property not attached to any particular tract of land, so they were not eligible to redeem the credit. By the same token, a potential buyer who had lived in an RV was considered a first-timer, and therefore able to receive the credit if permanent home ownership became enticing.

Personal income was also a deciding factor, with the credit either lowered or eliminated altogether for buyers who made too much money. Known as the phase-out range, the income limits were [source: IRS]:

  • Nov. 6, 2009, or before: $150,000 to $170,000 for a married couple filing a joint return; for single filers, the range was $75,000 to $95,000. People with income at or below the bottom of the range could receive the full credit. If it fell within the range the credit was reduced. Above the top figure, no credit was given.
  • After Nov. 6, 2009: $225,000 to $245,000 for married couples, and $125,000 to $145,000 for singles.

A few other stipulations were in place, in addition to the income caps and principal residence rules. For example, nonresident aliens could not receive the credit, and neither could buyers purchasing a home from a close relative, like a parent, spouse, grandparent or child.

Sometimes, moves happen, whether or not we want them to. Unfortunately, these situations impacted people who'd previously enjoyed the credit. For example, if a homeowner decided to sell the home or stop using it as a principal residence less than 36 months after closing on the property, the credit had be repaid in full via the income tax return of the affected year. This applied only to the 2009 true credit [source: IRS].

However, anyone who received the 2008 interest-free loan "credit" would have to pay all remaining installments in the event of a move. On the upside, if the seller broke even or lost money on the home sale, the repayment could actually be lowered or axed completely [source: IRS].

Was the First-Time Homebuyer Tax Credit a Feat or a Fail?

And now for the million-dollar question: Was the first-time homebuyer tax credit a success, or an epic disaster? As with many things government-related, that all depends on who you ask. The U.S. government spent $16.2 billion in an effort to boost the housing market, with 2.3 million people participating in the credit program. According to the Center for Economic and Policy Research (CEPR), the credit did help to initially boost home sales and prices, although relatively modestly, until the program expired in April, 2010. This occurred because people who would have otherwise waited a year or two to purchase decided to flood the marketplace to take advantage of the credit. However that left a dearth of buyers for the rest of 2010 and 2011. Housing prices fell another 8.4 percent from second quarter 2010 (the end of the program) to the end of 2011. They continued falling well into 2012 [source: Baker].

Some experts say that the credit allowed some home sellers to get prices for their homes that were still inflated by the housing bubble -- which also meant that some home buyers paid more for their homes than they otherwise would have. The clear winners for the credit were the mortgage lenders who didn't have to accept as many short sales, and home builders who could sell houses at higher rates because of the delay in the bubble's deflation [source: Baker].

There are almost certainly scores of people for whom this deal went south, including those who had to relocate and thus were required to pay back the government, or others who lost their jobs and couldn't make even modest mortgage payments. On the flip side, the credit inspired many to put down roots earlier than they expected, and if the housing market continues on a gradual, but upward trend, they could stand to profit down the line. "As a single woman, I probably would have waited until I found a partner to live with before buying, if it were not for the tax credit," says Ryan O'Neill, who purchased her Atlanta-area home in 2010. "It allowed me to buy a house all by myself, which was very empowering."

Author's Note: How the First-time Homebuyer Tax Credit Worked

As someone who bought homes in both 2006 and 2010, I can tell you that they were great times to be a buyer ... not so much a seller, though! Yep, "ouch" is the word you're looking for.

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Sources

  • Baker, Dean. "First Time Underwater." Center for Economic and Policy Research. April 2012 (Nov. 12, 2014) http://www.cepr.net/documents/publications/housing-2012-04.pdf
  • Bell, Kay. "5 questions about the homebuyer tax credit." Bankrate. 2014 (Nov. 10, 2014) http://www.bankrate.com/finance/taxes/5-questions-about-the-homebuyer-tax-credit-1.aspx
  • Bell, Kay. "Homebuyer Tax Credit Claims and Payback." Fox Business. Feb. 21, 2013 (Nov. 10, 2014) http://www.foxbusiness.com/personal-finance/2012/02/16/homebuyer-tax-credit-claims-and-payback/
  • Cook, Christy. Interview via email. Nov. 11, 2014.
  • IRS. "First-Time Homebuyer Credit Questions and Answers: Basic Information." Nov. 6, 2009 (Nov. 10, 2014) http://www.irs.gov/uac/First-Time-Homebuyer-Credit-Questions-and-Answers:-Basic-Information
  • IRS. "Tax Credit to Aid First-time Homebuyers; Must Be Repaid Over 15 Years." Sept. 16, 2008 (Nov. 10, 2014) http://www.irs.gov/uac/Tax-Credit-to-Aid-First-Time-Homebuyers;-Must-Be-Repaid-Over-15-Years
  • Manni, Tim. "Is the first-time homebuyer tax credit still available?" HSH. June 9, 2014 (Nov. 10, 2014) http://www.hsh.com/finance/real-estate/is-the-first-time-homebuyer-tax-credit-still-available.html
  • Manni, Tim. "States with the best homebuyer assistance programs." HSH. Sept. 7, 2012 (Nov. 12, 2014) http://library.hsh.com/articles/first-time-homebuyers/states-with-the-best-homebuyer-assistance-programs.html
  • O'Neill, Ryan. Interview via email. Nov. 11, 2014.
  • The Economist. "The origins of the financial crisis: crash course." Sept. 7, 2013 (Nov. 12, 2014) http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article