First-Time Homebuyer Tax Credit Takes A Detour

by Peter G. Miller
October 26th, 2009

For months the tax credit for first-time homebuyers has been portrayed as a wonderful financial opportunity and with good reason: It is. First-timers can get as much as $8,000 in tax credits from Uncle Sam, a very good deal indeed.

In terms of FHA mortgages, the great idea has been to combine the first-time credit with FHA financing to buy a home with little or no money down. To do this a buyer must do two things:

First, get an advance from a state housing agency or an approved nonprofit.

Second, buy a property that requires not more than $228,571.42 in financing. (The FHA requires a minimum down payment of 3.5 percent of the purchase price and 3.5 percent of $228,571.42 equals $8,000).

No Money Down

For months, though, we have been saying that FHA mortgages with nothing down were likely to be rare. The reason is that fewer than 20 states have programs which make advances, money is limited and few nonprofits have such cash available. (Private lenders can provide advances, but not advances which substitute for the 3.5 percent down.)

While deals with no money down have been rare, what has been common are simply deals where first-timers get that $8,000 credit. The National Association of Realtors says IRS figures show that “1.4 million individuals will receive the benefit of the credit. NAR believes that roughly 355,000 (or 25%) of those sales would have not have occurred during 2009 without the incentive of the tax credit.”


Now we find that a number of those claiming the first-time credit do not actually qualify.

Basically, to qualify for the credit you must not have owned a home for at least three years. The credit only applies to the purchase of a “main” home — the place where you generally expect to live. You must purchase before December 1, 2009 (stay tuned, though, we expect this deadline to be extended). You must keep the property for at least 36 months. Lastly, you can’t earn more than $170,000 or more if married and filing jointly.

To get the credit you must file IRS Form 5405. In other words, unless you can get an advance from a state program or an approved nonprofit your $8,000 credit comes AFTER you have bought a house.

Not Qualified

It turns out, according to J. Russell George, the Treasury Department’s Inspector General, that a goodly number of those who have applied for the credit may not actually qualify. For instance, 73,799 applicants apparently owned a home within three years of claiming the credit — a big no no. Another 582 taxpayers under 18 years of age claimed the credit, a problem because minors cannot be bound by real estate contracts.

The problem here is not with the IRS — it has a very clear and understandable form. The problem is also not with the program — just look at IRS Form 5405 and you can instantly see who qualifies and who doesn’t. Rather, the problem is that in a huge program with more than 1.4 million participants some folks apparently do not read the form before looking for a property.

What happens if you apply for the $8,000 credit and are, in fact, unqualified? If buyers have to pay back the government immediately, that will be fine for those who held onto their $8,000. But for those who were less prudent, big problems loom ahead.

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