$7,500 vs. $8,000 Tax Credit

I have been asked by many first time home buyers, "What is the difference between the $7,500 Tax Credit and the $8,000 Tax Credit?"  

Steve Kaufman is a CPA that published an article titled FREE MONEY in the Houston Realtor Magazine that explained the tax credit in detail.  He included a helpful chart that parallels the differences between the two tax credits, but that magazine is not available to the public.  Using the facts from his article, I would like to explain the difference between the two tax credits to my readers.

Both tax credits can only be used by first time home buyers.  The $8000 tax credit is referred to as the American Recovery and Reinvestment Act of 2009.  This has been defined as someone who has not owned a primary residence during the last three years.  Once you buy the home you must occupy the house as your primary residence for at least three years or the tax credit you receive will be owed back to Uncle Sam.  Both of the tax credits apply to new construction homes, resale homes, manufactured homes, Townhomes, and Mobile homes.

The $7,500 Tax Credit was more of an incentive than a tax credit because it has to be paid back within 15 years, interest free, starting in 2010.  It applies to first time home buyers that purchased their first home between April 9, 2008 and January 1, 2009.  It must be filed with 2009 tax returns for credit to be received. 

The $8,000 tax credit is for first time home buyers that purchase between January 1, 2009 and December 1, 2009 and it never has to be paid back.  It's just free money from your Uncle Sam.  It can be claimed on your 2008 or 2009 tax return.  So if you are a first time home buyer you will need to close by December 1st which means you should be house hunting now.  It takes atleast 30 days to close on a home unless you are paying cash.

When you file your annual tax return you can claim this credit using IRS Form 5405.  If you claimed the $7,500 and are eligible for the $8,000 tax credit you can ammend your tax return by using IRS Form 1040X.  The maximum credit allowed for the $8,000 tax credit is 10% of the sale price up to the $8,000.  The maximum credit calculation for the $7,500 tax credit is 10% of the sales price up to $7,500.  To receive the maximum credit your income must be below $150K for married couples or $75,000 for individuals. 

Rather than waiting until tax filing for the $8,000, an advance on the credit is available on the credit from the U.S. Dept. of Housing and Urban Development (HUD).  The advance is available for first time home buyers using FHA-Approved lenders.  As an advance, the funds can be applied toward the down payment or closing costs.

Steven offered a great tip in his article.  If you are a first time home buyer and are sure you will purchase by December 1st and qualify for the tax credit, you can go ahead and start taking advantage of the tax credit by adjusting your payroll tax withholding with your employer by filing an updated IRS Form W-4 which will reduce your income tax withholding and will increase your take home pay which can be saved for your down payment.  Consulting with your tax accountant is recommended.