The 2008 Versus '09 Credit for Home Buyers

Does the tax credit for first-time home buyers need to be repaid? I have heard different stories and need to have this clarified. My son recently bought his first home. Will he receive a check for the credit, and, if so, when will he get the money?

The repayment rules depend on whether he bought his home in 2008 or 2009. If you bought a first home between April 9, 2008, and December 31, 2008, you are eligible for a tax credit of 10% of the home's purchase price, up to $7,500. But you must repay that credit over 15 years, starting two years after the year you claim the credit. Sell the home before you finish paying back the loan, and the balance is due in full the year of the sale. For more information about the first-time home buyer credit for 2008, see the IRS First-Time Homebuyer Credit Information Center.

But if you buy a house between January 1, 2009, and December 1, 2009, you could receive a credit for 10% of the home's purchase price, up to $8,000. This credit does not have to be repaid as long as you remain in the new home for at least three years.

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In either case, your son won't get a check for the credit. Rather, the credit will lower his tax bill dollar for dollar. The credit is refundable, which means that he can still benefit from the full credit even if it is worth more than his total tax liability. In that case, he'd receive a tax refund.

The question of when your son would receive the money is a bit tricky. If you qualify for the 2008 first-time home buyer credit, you'll claim the credit when you file your 2008 tax return, and you could receive a refund within weeks of filing. Taxpayers who buy a first home in 2009 don't need to wait until they file their 2009 returns (by April 15, 2010) to receive the money. To get the money into the economy faster, the federal government is giving you a choice of claiming the first-time home buyer credit on either your 2008 or your 2009 return. Use revised Form 5405 if you are reporting a first-time home purchase for either year on your 2008 return (the instructions at the end of the form include a lot of helpful information about the rules for claiming the credit for a 2008 or 2009 purchase). If you have already filed your 2008 return, you can use Form 1040X to amend it.

Even if you purchase a first home after the 2008 tax-filing deadline on April 15, 2009, or you expect to buy a new home in the next few months, you can still claim the credit on your 2008 tax return either by requesting a six-month extension for filing your return (which doesn't extend the deadline for paying any taxes owed) or by filing an amended return. See this fact sheet from the IRS for more information about these options.

Not all first-time home buyers qualify for the credit. The 2008 and the 2009 credits begin to phase out if your modified adjusted gross income is more than $75,000 (or $150,000 if you're married filing jointly). The credit disappears entirely after your income reaches $95,000 if you're single, or $170,000 if married filing jointly. See Form 5405 for the full calculation (use the most recent version of the form if you bought a home in 2009; earlier versions did not include the 2009 tax credit). You are considered a first-time home buyer if you (and your spouse, if you are married) didn't own a primary residence in the past three years. The credit does not apply to rental property and vacation homes.

For more information about the tax provisions in the stimulus package, see What the Stimulus Means to You and the IRS's fact sheet about the stimulus.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.