Who is eligible?First-time homebuyers are eligible for the $8,000 credit. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the purchase. Move-up buyers are eligible for the $6,500 credit. Move-up buyers must have resided in their homes for three out of the five previous years.
How does the tax credit work?Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual's income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all of the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return, a person has a total tax liability of $9,500, an $8,000 credit would wipe out all by $1,500 of the tax due.
What happens if the purchaser is eligible for an $8,000 credit but his/her income tax liability is only $6,000?This tax credit is what is called a "refundable" credit. Thus, if the eligible purchaser's total tax liability was $6,000, the IRS would send the purchaser a check for $2,000.
Can I use the credit amount as part of my downpayment?Some states and local governments have provided mechanisms to provide for this by providing a loan secured against the credit. Check with your loan officer for such programs.
This article is compliments of Suzanne Smith with HNB Mortgage.
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