The 15,000 Home Buying Tax Credit – What it is and isn’t
Since the senate agreed on a new bill which included a $15,000 tax credit for home buyers (not only first time home buyers, but all home buyers) there has been quite the mass confusion. So I’d like to clear it up with a few simple points to show what it is, and what it isn’t and a few of the major details:
Major details:
The tax credit would be available for people who buy houses starting the day the bill is signed. I realize many of you think this is “unfair”, but no matter what date is picked someone will think it’s unfair.
What it is not:
You will NOT get a check for $15,000
You canNOT use it for a down payment
Most people will NOT be able to take advantage of the full $15,000 (i’ll explain later)
This will NOT be in conjunction with the current $7,500 15 year interest free loan
If you close before the bill is passed, you will not qualify
Not every single house qualifies (I’ll elaborate on this when the bill actually is signed since this qualification could quite easily change)
What it is:
It is a tax credit
A credit that can be used to lower tax liability over 2 reporting years
How does it work: (slightly modified version from [1])
Billy and Sally, who have a single dependent and file jointly, buy a house for $200,000 and make $60,000 / year (slightly over the U.S. median family income). They take a standard deduction and claim three exemptions reducing their taxable income to roughly $37,100. Their total tax liability is roughly $3,775.
This means if nothing changed from 2009 and 2010 they would only utilize $7,550 of the credit and the rest would be forgone after the second reporting year.
But it’s not all lost because it does help some, just not the ones who make what is considered the median family income of $58,407 according to the U.S. Census Bureau. The people that can really start taking advantage of it are people that make about $65,000 and claim single, or married couples that make about $100,000 combined.
So just to reitterate the point, this maximum tax credit will be equal to your tax liability over the 2009 and 2010 reporting years, or $15,000 which ever is less.
How can you use it?
Now I hope you understand how it works, and you feel this credit is enough to intice you to buy here is how you can use it.
Once passed you can change your W-4 with your employeer(s) to withold less (by claiming more allowences). This will give you more money per check up front, and help you build your down payment, or buffer it more. You can get a rough estimate on your tax liability by using a W-4 witholding calculator. Just be aware if you don’t buy a house within the year after the bill passes you better still have that money to pay back the taxes not witheld and the penalties for not witholding enough.
If you have your down payment already and you’re going to buy right after the bill passes you can still change your W-4 allowences so you have more money per pay check and put that in the bank, or do the needed repairs (if you bought a fixer up’er). Again, just check to see what your possible tax liability will be using a W-4 Calculator.
note:If you change your W-4 keep an eye on how much of the credit is used in the first year, and change your W-4 accordingly in the second year to make sure you are witholding enough. After the second reporting year, make sure you recalculate your W-4 to what it is with your default excemptions.
What I suggest:
If none of this makes sense to you, work with a CPA/Accountant and have them help you out, as you could quite easily get yourself in a huge financial mess.
What you need to know:
What Does Tax Liability Mean?
The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable event. Tax liability can be calculated by applying the appropriate tax rate to the taxable event’s tax base. Taxable events include, but are not limited to, annual income, the sale of an asset, a fiscal year-end or an inheritance. [1]
Comparison of the home buyer credit proposed by the House and the Senate[2]
HOMEBUYER CREDIT:
* House – $2.6 billion to repeal a requirement that a $7,500 first-time homebuyer tax credit be paid back over time for homes purchased from Jan. 1 to July 1, unless the home is sold within three years. The credit is phased out for couples making more than $150,000.
* Senate – Doubles the credit to $15,000 for homes purchased for a year after the bill takes effect, increasing the cost to $35.5 billion.
References:
[1]http://www.stupidcents.com
[2]http://www.investopedia.com/terms/t/taxliability.asp
[3]http://hosted.ap.org/dynamic/stories/C/CONGRESS_STIMULUS_HIGHLIGHTS?SITE=CARIE&SECTION=HOME&TEMPLATE=DEFAULT
PS: I know i’ve missed something so if I have leave a comment and I’ll be sure to add.
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Is the tax liability (used to calculate 15000 housing credit) before other credits are applied (such as education credits or child tax credit) (line 46 on 2008 1040)? And what about other taxes (such as SE tax)? Will that be included in calculation of tax liability? After other credits named above we owed $411 (line 56) then had to add SE tax of $8171, so our total tax (after other credits–not housing) was 8582 on line 61.
We’re in the process of buying our first home…..Wondering if we are looking to buy a 91,000 home (and must put 5% down, right), will we qualify for the full $9100 credit since our total taxes (including SE tax)before any credits is $11857???
Any help will be appreciated.
Hi Ramona,
This would be the tax liability AFTER other deductions are applied. From what I’ve read there is no $15,000 OR 10% rule in this housing credit, so if your total tax for the year was $11,857, then you’d qualify for a full $11,857 for the tax year 2009 and the other $3k would transfer over to the tax year of 2010.
I don’t have a tax form in front of me so I can’t verify line numbers, but it sounds like you have the overall concept in place.
Shoot on over to irs.gov and work out the W-4 Calculator and you’ll get a good idea of your total tax liability for 2009.
Thanks.
Thanks for the help!
Your tax liability would be found on line 64 on form 1040- 2007. You would get back the difference of line 72 – 76. If you have a number on line 73, your refund will instead be line 72 + 73.
we own a home now but are purchasing a new home would the 15,000 credit be available for us?
Debbie,
How it is currently written if you purchase a new house that will be your primary residency then yes, you would qualify for the $15,000 credit.
This leaves quite a few undesired loopholes like house sales in-between individuals with no real estate broker in between (basically house swapping). That’s just one of several possible loopholes.
But to get back on track, yes you would qualify for the credit under the current bill by the senate.
Unfortunately, some first time home buyers are relying on the old $7500 and the senate amendment “sunsets” that upon signature…leaving them out in the cold if they don’t pay very much tax. How can the government take away something that home buyers have relied upon when entering into legally binding contracts that won’t close until after signature? This is unfair and I am e-mailing congress to let them know in hopes that it will be corrected.
Peggy,
I have also wondered that, and honestly believe people that are already in the process SHOULD be given the choice (although this may be a tax nightmare). Although the $$ amount is quite higher with the senate bill, the amount saved by avg americans (in the 50k – 60k range will be far less (esp if they have children).
I am actually nearing the time to purchase a house, and am hoping for the 15k bill because I would be able to take advantage of the full 15k and would work my W-4′s to increase my downpayment to over 20% to remove the PMI requirement.
The biggest problem now is people living outside their means. The income to house expenditure ratio is still higher then it should be. I myself am looking at a house in the 250k range, which is well within my means (file head of household making 90k, with 1 dependant and 250k is my MAX loan amount (i’m shooting more for 200k). Why? because a primary household should NOT be looked at as your biggest asset. An asset is something that feeds into your income category (ie stock with dividends). On the other hand a house is a liability as it requires more expenses (ie repairs / maintinence etc).
Thank you Kevin, I am a real estate broker with lots of clients trying to figure out this tax credit. Sincerely, Erika Foye
Can someone use this tax credit if they are going to be building a house this year?
It will be our primary home, we are going to rent out the older home.
@ben.kevan
When is this bill expected to be voted on by the house?
Hi Ben-
I purchased a home, mid April of last year (so it qualifies for the $7,500) but obviously not the $15,000, correct? When do they foresee that they will put this new bill into effect? I want to make sure that I don’t miss out on either and perhaps need to file asap? Also I’ve heard talk that the $7,500 could be turned into a credit instead of a 15 year loan, would that apply to me as well?
@bret
I have the exact same question, as I closed in june 2008. I would be quite content with the 7500 interest-free loan, is this (tentatively) saying that if this senate version is passed, then I would get nothing? If so, would filing my taxes *before* the signing date actually be important? This seems like it would be very strange, but I’m not putting it past them…. Thanks!
Cbris,
Let me get back to you and read one part of the amendment just to be sure I give you as accurate answer as possible. But from what I remember (and I may be wrong) you would qualify since your house was built or started being built after the sept deadline. However, in the amendment labeled 106, I do not see any “build date” stipulation, and it may have been removed.
Debbi,
With the pressure from Obama I’d guess within the next 3 weeks (or at least a more definitive answer shortly). With all the news, I’m really watching the markets to see how they react.
Bret,
Yes, you qualify for the 7,500 which works quite differently then the 15,000. You quite possibly may be getting a better deal with the 7,500 bill. Any retro of any bills would all depend on how they were passed. It’s impossible to figure out (until then) what retro date would be given (if any) to a change of the 7,500.
All,
Also to correct myself that is a 10% stipulation IN the amendment. So again Debbie you would be locked to 10% of the cost of the house or 15,000, which ever is less.
@Andrew
No, it would only sunset purchases after the bill signing, not house closes prior to the date.
Here is a copy of the latest Amendment:
http://www.benkevan.com/blog/wp-content/uploads/Amdt_106.pdf
Thanks for the update. There is a lot of conflicting information about this credit. Wonder if 2 people who file individually can both take this credit? I am a Realtor who is working with a couple who are unrelated and file separate income tax. Could both take the max amount?
Pam,
A married couple filing single will get a max credit of $15,000 or 10% whichever is lower (split 50% to each person)
If I remember correctly 2 unmarried people filing separately buying a house together can split the tax any % each way as long as it doesn’t exceed 10% of the cost of the house OR $15k
In regards to the $7,500, are they no longer considering making that a absolute credit (as opposed to the 15 year loan)? I heard rumblings a couple weeks ago about this possibility. Would the $15,000 deal totally do away with the possibility of the $7,500 being a credit?
@bret
The bill I have read does not touch on making the already in place $7,500 a credit instead of interest free loan.
I wouldn’t say that the $15,000 deal would totally do away with the possibility of the $7,500 being a credit, but with the trimming that they are doing on the stimulus package I would have to said it isn’t likely, but anythings possible and it is quite possible that the dems will have to give up some push by the republications to get something like this passed, but as I said there is nothing in the current bill regarding that, only the strike of “July 1, 2009″ to “the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009″
Thanks for all of your answers.
Do you have to put down 5% on your house to get the 15k?
I want to have a house built this year and live in it as primary residence. But, I am keeping my old house for my parents to move into. As the bill is written now will it treat my new home as a second home even though I’m going to live in it? Also, does the $15,000 credit apply to homes you are having built or just to existing homes on the market?
Mike,
That’s what I’ve read in context on sites like Wall Street Journal BUT, I have not seen that stipulation requirement within the amendment itself. This may be on the discretion of the lender / broker.
Walk,
How the bill is currently written your new home would qualify you (i would double check the verbage between the changes of all bills, as the type of house that would qualify has changed) for the $15,000 tax credit. It’s not for “first time home buyers” but anyone that is looking to buying (and after discussion there may be something put in there to exclude people that have recently sold, BUT you’re not looking at doing that).
Older versions of the bill I’ve read pointed to homes already on the existing market, but others I’ve read have no definition in this area (quite a bit different between the house / senate offerings). There still are some changes to be done before final signing, and I imagine this is one area that will be looked at (what type of house qualifies, and recent selling of a house etc).
With that said, I think they will allow people to build homes and get the credit because the stimulation to the construction sector who has been hit hard would be positive. If they did knock it off, and say only to existing housing, then they are making a mistake as many people would buy, then dump their house just to get hte credit and no stimuluation to the markets was done (except a realtor).
My husband and I are buying the condo I have rented from my parents for the last many years. We did not qualify for the 7500 because it was a family purchse; is it clear whether this will also be an issue with the 15K? We are planning on putting 3% down (FHA regulations, 2008), but I saw something about needing to put 3.5% down to qualify . . .
We plan to close the week after next, but are unsure if we should wait based on this situation . . .
Allison,
I hate to tell you this but that same stipulation regarding purchases from family members still exists in the new bill, therefore you would not qualify for the 10% or $15,000 because you are purchasing from an immediate family member (I’m guessing the deal you’re getting beats the hell out of those benefits anyways).
Remember when putting down 3% that you will have PMI for a few years. I’ll create a blog entry that gives a good base on Renting vs Buying (and also how long it would take to stop PMI with normal payments and with or without appreciation built in.
This was based on a google spreadsheet from some site (that i’ve modified a little bit). I’ll have to find the original source before I link it, as I think giving the correct respects to the original creator is imperative.
First, Thank you for your reply and help!
Second, I also read talk about the possibility of not having to pay back the $7,500. However, I doubt this is the case because (a) all recent versions of the bill I have since read do not suggest this and (b) if you’ve already bought a house, the government paying you more money does not stimulate any further home-buying, which is the point of all of this. Kind of disappointing, but it makes sense. I think the initial confusion was due to people who bought last year over-optimistically (and incorrectly) reading into the definition of “sunset”.
Oh boy don’t get me started on the usage of “sunset” in a bill that would get tons of eyes peering in on it. The mass confusion caused by certain uses of words has been quite funny.
I am quite optimistic that the $15,000 tax credit will actually do anything to stimulate the economy unless people use it right (ie. lower W-4′s and use the extra $$ / Mo for spending or repairs on the house).
Who gets hammered in this whole market? Consumer Electronics IMO (I’ve been quite successful with shorting BBY in $5 swings). But the fact that Tarp and passing of the stimulus may come as a 1, 2 may do wonders for consumer confidence (for the near term) then reality and inflation will settle in.
Honestly, I am not a home owner and have been looking for the last few months, but the $15k tax credit is the incentive I was looking for, and I do expect the house I purchase to go down in value BUT the 15k tax credit to me, is a stop loss (market term) in the whole process. Banks have quite a big inventory on hand that they haven’t sent to the market because it would cripple the whole economy. Many reports point to 60 – 70% of all bank owned houses are NOT currently on the market, bringing us to at least another year or 2 of this current valuation.
I’ll write more about that in a little bit. I realize many people that have read this article don’t realize that this was actually my first writing with regards to any type of political or financial market. However, I have contacted some websites that use my RSS features for the core of my site (Linux Technology) to use a different RSS link, so I can expand my site to more things that I enjoy in life, Mixed Martial Arts, Financial Markets, Stock Market, Linux / Computers).
I’m going to start a cycle of Candle Stick trading methods with the stock market. And hope to do other standard market trends (if time permits as always).
Thanks for visiting and hope it was helpful.
here is my situation
I am single with no dependents and made 165 K in 2008, didnt file taxes yet and didn’t worry about the 7500 credit because it didn’t apply. I am closing on 2/15/09 on my first home. What should I do? delay closing? or go for it?
I heard, there is talk that the income limit would be lifted on the 7500 bill? Is this true?
I am getting that feeling that I am the one getting screwed in this bill….
and another question….
when is the official sale date of a house? Is it when it gets recorded or something else?
just to add to the drama, my locked rate expires on the 2/15/09 and my realtor and loan officer said we must close by the 15th or else i have to pay $500 to extend my awesome locked rate of 5% for another week till 2/22/09. Does closing escrow include recording the sale???
Please advice, so I know what to tell my realtor today!
This is major suspense…. lol
My wife and bought a house in June of 2008 and qualified for the 7500 credit that gets paid back. We havent filed taxes yet but have an appointment with our accountant in about 2 weeks. What happens now? Are we SOL?
@Nancy
Nancy,
As always you should do your own due diligence in your finances and any advice should be mulled over with your accountant, or other financial advisor, as I am not a financial advisor. With that said I would follow through with your purchase as is. Locking in a 5% rate would save you more money in the long run, then the initial tax credit, and losing that rate isn’t worth getting government back funded. If the bill passes today or before your 2/15 cut off, then it’s just a bonus
@Dan
Not all is lost, you still get the 7,500 loan WHICH may be better for you then the 15,000 credit. Remember not everyone will make use of the full 15,000 credit.
I still do not understand this completely. I am a single, no dependents, and my AGI was 50,000. I owed 8500 but paid 10,000. I received a refund for $1500. Does this credit lower my AGI to $35,000? Or does it give me a credit for 8500 and I would receive 10,000 for my refund. If it goes in the tax credit area of my filing, it would just lower my AGI to 35,000. That would lower my tax liability about 3,000. Which is it? Does it lower your AGI and go under Tax Credits? Or does it come right off the bottom line? Help
@Matt Zec
Matt,
From my understanding of the bill that I linked in one of my comments above is it takes it from the bottom line (directly from the tax liability) and is not ment to lower AGI.
Hey Ben,
Does it make sense to file now and get the 7.5k loan ::before:: this bill passes if that will help now in bridging the gap between downpayment and savings? Or is that all null and void since this other bill is in the works?
Hi!
My husband and I purchased a home on December 19, 2008. We entered a first time home buyer lottery ( I hate saying 40B but I guess that is what it technically is) and purchased our home for $152,000. Combined we make about $60,000 and have no dependents (yet! first one due in April).
Do we rush and file our taxes now to take advantage of the $7500. I am afraid we will not qualify for the $15,000 and if it is passed and signed then will the $7500 option be gone?
Thanks!
Hi Lauren:
If the Senate version of the $15,000 bill passed (as it is now), you would not be eligible for the $15,000 credit as only buyers who purchased after the enactment date (maybe sometime in late February 2009) would be eligible. It appears from your post that you would be eligible for the $7,500 “credit” (loan) if you meet all of the eligibility requirements because you purchased during the time when the $7,500 credit was in place. I’m not sure why people think that have to rush to file – it appears if you bought during the eligibility time for the $7,500 credit (April 10, 2008 – enactment of new 15,000 statute)(and meet all other requirements), you’re still eligible to take the credit even if the 7,500 is “sunsetted.” Congrats on the new child!!
I want to buy my first home. I make 34,000. How would the 15000 bill affect me?
@Nancy
Nancy, congrats on making 165k in 2008! I don’t think they are writing the bill to accomidate you so don’t feel left out. Enjoy…
Thanks for the great explanation!
Bummer!
I know this goes against what a stimulus is supposed to be but… I may be becoming less stimulized. I’m one who would have rather had $7500 in the bank working for me and buffering my family if the economy got worse. My fiance and I were about to make an offer on a really nice house putting down 5% and hoping to close before we filed the 2008 taxes. The down payment will have taken a major chunk out of the rainy day fund and leave us vulnerable if things turn for the worse and the layoffs continue. Now we’re debating on why we would want to risk buying. A few extra dollars every week isn’t doing it for me as much as a fat checking account right off the bat.
No matter what checkout lane I chose, it’s the slowest.
Thanks for letting me vent.
heres my situation and i dont know what to do. i just bought a house, we closed january 30th. we know that we qualify for the $7500 but if we dont file out taxes now would we get the $15,000. or would it overall just be better for us to file now and stick with the $7500? also if we wait and then dont qualify for the $15,000 would we not get the $7500.?
@justin
No matter when you file, you’ll get the 7,500. To qualify for the $15,000 your close date HAS to be after the day the bill is signed.
@Brad
I believe most people will benefit more from the $7,500 credit (especilly the lower income people). The 80k plus families will be able to really benefit from the 15k, but again it’s not just cash in your pocket like you say.
I also am looking at buying and neither is required for me to get a house, but sure does make me happy that I’ll get something to buffer the loss of equity the house I purchase will have. Vent here any time.
@linda
You’ll have a minimum benefit from the $15,000 bill and may actually be less helpful then the current $7,500 depending on what your current tax liability is, but information on your tax information would be required to decide that.
Do the W-4 worksheet on http://www.irs.gov and you can get an idea of your tax liability. Multiply that by 2, and that’s what your potential tax liability credit would be.
@cindy girl
Thanks for your great post. I need some help like yours to come up with posting ideas
.
@Danno
Honestly you should be in a position to buy a house without either stimulus packages. In my opinion this stimulus shouldn’t really get buyers who aren’t in the market, or have the funds ready for purchasing a house with AT LEAST 3.5% down (FHA requirement). This bill is good for a year, and the housing market isn’t going to shoot back up, and the fact that 70% of the banks housing assets in forclosure aren’t even on the markets.
This current valuation isn’t a 3 month deal. The prices will stay where they are into 2010, maybe even 2011.
I’m going to write a blog regarding the current status of housing and why it’s not required to rush into a house.
Ben
[...] a bit easier to grasp then the recently approved $15,000 tax credit which is going around. You can read about here. I believe the best and clearest explination of the $7,500 credit was from forbes.com which I have [...]
i have 8% (boston market)…i’m consider the stimulus as padding to my savings/downpayment, not as the single contributing factor. But the year timeframe is a good point.
sidenote: headed to montreal for ufc 97. silva! wrong post, oops
Hey Danno,
Then you are using the credit how I think it should be used. To gain interest while you repay, giving you free money. I see these incentives refueling people who can’t afford to buy houses, to buy houses and live outside their means with a Housing Expense / Income of about 38 – 45%.
As for UFC 97, I am quite unexcited about the Silva fight, as I don’t see how it can be competitive. You have a sloppy brawler to a magnificent tachtition. It’s going to end up like Franklin vs Silva I & II.
I’m interested in seeing what condition Rua is in, and wish the Herman / Loiseau fight was televised. Dennis Kang being on the undercard is blasphamy and I really want to see what Brian Stann does with the step up in competition.
Would you be willing to take some pictures that I could post up? Are you going to the weigh-in’s at all?
Check out some pictures I’ve taken:
http://benkevan.com/gallery/index.php?cat=4
Currently my name is the only name listed on my mortgage, because I bought it solely by myself. My husband and I are in the process of refinancing to get a better rate and will then have both names listed on the title/mortgage. However, would it be possible to sell my house to my husband so he could take advantage of the take credit? If so would it matter if we filed separately or jointly? Just curious how the whole system works and all the loop holes….
Here’s a question I’m sure other people are curious about. Looks like this bill for the 15k credit is probably going to be in effect as soon as next Monday (President’s Day). I’m about a week away from closing on my first house and already have taken advantage of the $7500 tax credit. Will I also be able to take advantage of the 15k credit by withholding more on my W2′s in the coming year? This seems beneficial because in single and my taxes last year were nearly 12k.
I’m not going to comment on the 15k Housing credit because it seems as though it may get removed / shaved:
See the following from http://www.bloomberg.com
“Baucus said about 35 percent of the plan would be set aside for tax cuts and the remainder would be government spending. He said lawmakers agreed to “shave” a proposed $15,000 tax credit for homebuyers, though he didn’t provide specifics.”
Hi Ben,
Thanks for the blog, this has been the most thorough explanation of the $15,000 version of the tax credit I have currently found.
My fiance and I are currently in the process of building our first home. Estimated closing date is the first week of June. I know with the original $7500 credit, if you bought in 2009 you could amend your 2008 return to receive the credit earlier.
I have read through several versions of the bill and thought I had read a version which would allow this for the proposed $15,000 credit. Have you seen this or am I imagining things (again)?
Not sure how exactly it would work, under this plan, since the credit is based off future taxable income and not the price of the home.
Thank you
Sorry, just now saw your last post.
@Phil
Not a problem. I hope the stimulus is just adding a clause for “First Time Home Buyers”.