Now is a good time to purchase a home and there are a lot of good deals awaiting those with a down payment to facilitate a purchase. Congress has come up with a novel way to help first-time home buyers afford the down payment on a home.

 

For home purchases made after April 8, 2008 and before July 1, 2009, a first-time home buyer can receive a refundable tax credit equal to 10% of the purchase price of the home, but capped at $7,500 ($3,750 for married taxpayers filing separately).

 

But before you get too excited, you should know that the credit is essentially an interest-free loan that must be paid back over a 15-year period. Beginning the second year after the year of the credit, the taxpayer must begin repaying the credit in instalments equal to 6.67% of the amount of the original credit. The payback will be in the form of an additional tax amount on the homeowner’s federal tax returns. If the home is sold or no longer used as a primary residence before the end of the 15-year period, the balance of the un-repaid credit must be repaid in the year the home is sold or no longer used as the taxpayer’s primary residence. However, the credit repayment amount can't exceed the gain from the sale of the residence to an unrelated person, and no repayment is required in a year after the death of the taxpayer.

 

The law includes a liberal definition of a first-time home buyer: it is a taxpayer (or spouse if married) who had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies.

 

To make sure this credit is not used by wealthy taxpayers, the credit is phased out for individual taxpayers with incomes between $75,000 and $95,000 and between $150,000 and $170,000 for joint filing taxpayers.

 

Taxpayers with a purchase in 2009 that qualifies for the credit can elect to claim the credit on their 2008 tax return and not have to wait until 2010 when they file their 2009 return to get the credit.