Tax Breaks For New Home Buyers

According to The American Housing Rescue and Foreclosure Prevention Act of 2008, passed by Congress in July, first time home buyers who purchase homes between April 8th 2008 and July 1st 2009 are eligible for a first time home buyer tax credit. They can get $7,500 tax credit or up to 10% of the value of the home for home purchases under $75,000.

There are certain conditions though. The credit has to be repaid over 15 years, so effectively it’s an interest-free loan from the government. So if you buy a home this year and claim the credit next year, you start paying $500 back in your 2010 taxes which you would file in 2011. So at least you get a few years grace period before you have to start paying it back. Not sure what happens if you sell the home in 2010, though. Maybe you might have to pay back the entire amount in a lump sum.

There are also income exemptions. The credit is phased out for individuals with modified adjusted gross income (AGI) between $75,000 and $95,000. For married couples filing a joint return, the phase out range is $150,000 to $170,000.

But the good news is that if you haven’t owned a primary residence for 3 years by the date of closing, you’re now considered a first time home buyer again!

This is the government’s way to encourage home purchases and prop up housing for as long as possible. This is their “soft landing” approach, where by they try to drag out this mess for as long as possible. Instead of having a quick easy death for banks and mortgage companies, they’re going to keep interfering and prolong the recession.

Regardless of the motives behind it, its out there for home buyers. I’m not jumping to buy at this point since I think there’s probably a little more downside next year followed by several years of stagnation.

Foreclosures have hit record highs and there are seemingly good deals all over the nation. My condo is currently in foreclosure and several of my friends have expressed an interest in buying it as an investment. I’ve told all of them to wait until they can actually cash-flow on investment property. Unlike back in 2005, where it was common to be negative several hundred dollars on an investment property, today you should be able to get 6% or better cash-on-cash return. In fact, in some places you can actually buy properties for under $5,000 and your effective return might easily cross 25% per year.

Before you rush out and start buying any property, I suggest you read the following books: