Thursday, April 02, 2009

The $8,000 Buyer Tax Credit

by Osman Parvez
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It's tax season so here's a little information on that $8,000 credit for home buyers.

Eligible buyers are defined as those who have not owned a home in the previous three years (i.e have been renting). The tax credit is refundable, meaning it applies even if you don't have tax liability. There are income restrictions. You must also hold onto the house for at least three years or face recapture. The purchase must be made after January 1, 2009 and before December 1, 2009.

There are additional exceptions, including purchases from relatives. Consult with your tax adviser before buying. Check the resources linked below for more information.

Additional resources: An article from Yahoo and more details from US. News. Detailed information and links to reference material from About.com.

Hat tip: Gabriel Heiser



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6 comments:

  1. I did a poll on my site and many home buyers sitting on the fence are actually excited about this tax credit. So I don't under stand why one commenter said this break would make people mad.

    - Ben
    http://www.8000credit.org

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  2. Will home sellers lower the price of their house, because of this credit? This is not an incentive for a home seller to sell their house for less. This is an incentive for a home buyer to pay $8,000 more before the Dec. 31st deadline.

    Prior to Jan 1 the value of any house was x.
    From Jan 1 to Dec 31, 2009 the value of the house is x+8.
    After Dec 31 the value is x (the incentive expires).

    Again, the seller has no incentive to lower the price due to this tax credit. The new buyer, Jerry, pays x+8 now and receives 8 back from the government. If Jerry holds onto the house for 3 yrs Jerry only paid x. Yippee!

    However, the next buyer isn't incentivized by the tax credit, so when Jerry resells the house Jerry receives x, not x+8. Jerry paid x and receives x. The tax credit is net zero for Jerry.

    Jerry actually loses $8k if Jerry sells in less than 3 yrs.

    House prices move up or down over time, so one could use y's and z's for future prices, but it doesn't change anything, the "+8" is the issue here.

    Realtors have a fiduciary responsibility to inform home buyers that this is a government subsidy to the seller NOT to the buyer. Worse, the buyer could be out $8k if he/she has to sell within 3 yrs. Osman and other honest realtors start making your calls.

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  3. This credit is not enough to entice buyers here in Summit County when the average home is priced at 700K. First home buyers must move out of this area to afford a home. I wished the credit was somewhat linked to the official avg home price per area vs being just a set number. $8,000 very good if you are buying a $200,000 home, that is almost 20% of the down payment but not here.

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  4. A few details on this interesting credit:

    You need to purchase the home before Dec 1, 2009 (not Dec 31st). Strange date, I know.

    Not only do you need to own your new home for 3 years, but the taxpayer needs to occupy it for that time in order to avoid credit recapture. This means you can't move into a home for a year and then rent it out without avoiding paying back the credit.

    Also, there are situations in which you own a home and are able to take advantage of the credit. The new law says that you can't have lived in your own home for the last three years to qualify. If you have a rental and haven't lived in your own home in the last three years, then you can qualify for this credit. This probably does not apply to a lot of people.

    One nice final note is that you can collect this credit without waiting until next year by filing a 2008 return (or amending it).

    Want more details, go here: http://www.irs.gov/pub/irs-pdf/f5405.pdf

    Also, in response to previous post -- do brokers always/sometimes have a fiduciary responsibility to buyers?

    Agree that this would tend to drive prices up -- shifting the demand curve to the right. You would expect prices to go up, but not by exactly $8,000 (which implies a vertical supply curve). Instead what we're likely to see is a increased supply of sellers (moving along the supply curve), a higher volume of sales, and increased prices. So buyers win (as long as they qualify), sellers win, buyers that don't qualify lose and realtors really win.

    Problem is -- does $8K make a big difference when entry level homes in this county are $300K? Under 3 percent of value of home is underwhelming.

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  5. Great comments guys. I'll correct my original post for Dec 1.

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  6. In response to a previous post, we agree the tax credit drives prices up, but the amount is far less than 3%. It is not as simple as a one time static demand shift right. There is a 3 year lock-up for buyers and a Dec. 1st expiry date. The demand curve shift right is temporary and shifts LEFT in less than 8 months. Importantly, even if a new buyer meets all the tax credit criteria, he/she never gets to participate in the demand curve shift as a seller and he/she knows that upfront.

    After learning about the tax credit no new buyer would pay $8,000 more (2.7% of entry level house price) to fill out extra tax paperwork to gain a payout of negative $8,000 anytime in the first 3 years and $0 in the 4th year.

    Would a new buyer pay $6,000 more for a payout of -$6,000 anytime in 3 years for +$2,000 in year 4? One could argue, not a rational buyer. How about paying $4,000 more now for -$4,000 in 3 for +$4,000 in 4 on the whims of a minimum $300,000 investment?

    We are starting to talk very small numbers even relative to the $300,000 entry level price and really not moving the needle relative to higher house price levels. The tax credit is a very small, very narrowly focussed, very temporary boost to Boulder housing.

    ReplyDelete