Homebuyer Tax Credit ... or Loan?

Get a different kind of tax credit for 2008-2009 home purchases.

Laura Adams, MBA
4-minute read
Episode #110


This show is about a new and different type of tax credit that’s available to certain first-time home buyers.

The New First-Time Homebuyer Tax Credit

The IRS is offering a new tax credit—but pay attention because it’s a limited-time offer! It applies to first-time home purchases completed after April 8th of 2008 and before July 1st of 2009. The credit only applies to your primary residence. Vacation homes, rental properties, and homes outside the U.S. don’t qualify. If you built a home, the first date you occupied or will occupy the property is considered your purchase date. So, if you have a qualifying new home or condo or are planning to purchase one before July 1st, don’t miss out. 

Who Qualifies for the Credit

Even though it’s called the First-Time Homebuyer Credit, guess what? You still qualify for it even if you’ve owned a home in the past. You actually qualify as a first-timer if you did not own a home for three years prior to making a purchase during the qualifying period. Again, the qualifying period is from April 8, 2008 to July 1, 2009.  (Note: since this episode's publication there have been changes to expand the number of people who qualify.  You can see those new rules here.)

How Much is the Credit?

Tax credits are great because they reduce your tax liability dollar for dollar. The first-time home buyer credit is even refundable, which means it increases any refund you’re owed. So you can take full advantage of this credit whether you owe tax or not. The credit must be claimed on IRS Form 5405. You’ll find a link to this document in the show notes at the bottom of this page .

You’re allowed to claim a credit for 10% of the purchase price of a qualifying home. The maximum credit is $7,500 for taxpayers filing as singles, heads of household, or married couples who file joint returns. For married people who file separate returns, the maximum credit is $3,750. So if you bought a home for $75,000 or more, you’ll get to claim the full credit amount.

Tax Credit … or Loan?

But before you start dreaming about what you’re going to buy with this hefty tax credit, here’s the deal: it must be repaid to the government. You have to start repaying it in the second year after you claim the credit. It has to be paid back in equal annual installments over a 15-year period. So they probably should’ve called it the “Haven’t-Owned-a-Home-for-Three-Years-Homebuyer-Federal-Loan” instead of the First-Time Homebuyer Tax Credit, if you ask me. But hey, whatever it’s called, who can knock an interest-free loan?

Here’s an example of how the repayment would work. If you qualify to claim a credit of $7,500 for 2008, you would have to begin paying one-fifteenth of it back in 2010. This means you would add an additional tax of $500 on your tax return for each year from 2010 to 2024.

Exceptions to the Repayment

There are some situations in which you’d have to pay back the entire tax credit balance all at once. If you sell the home or stop using it as your primary residence, all the remaining installments become due on that year’s tax return. This would be the case if you decide to make the home a rental or vacation property, for example. If you sell it, the repayment amount may be altered or eliminated based on whether you gain or lose money on the deal. If you die, remaining installments are only due if you have a surviving spouse and filed a joint tax return.

Income Limits

There are limits placed on your income to be able to qualify for this credit. Your adjusted gross income must be lower than $170,000 if you’re married and filing jointly. The credit is reduced if you earn between $150,000 and $170,000. For singles, heads of household, and married filing separately, the upper income limit is $95,000. Your credit gets reduced if your income is between $75,000 and $95,000.

When You Claim the Credit

If you and your home purchase were eligible for the credit in 2008, you must claim it on your 2008 tax return. But if your eligible purchase was or will be in 2009, you get to choose to claim it on your 2009 return or on your original or amended return for 2008.

More Potential Tax Breaks

There may be an even more attractive home buyer tax credit coming soon. It’s part of the economic stimulus package that’s being considered right now. It would give all home buyers a true tax credit of 10% of the price of a primary residence, up to $15,000. I’ll keep you posted on this pending legislation.


In fact, since this episode's publication there have indeed been changes to the First-Time Homebuyer Tax Credit.  It is now the Expanded First-Time Homebuyer Tax Credit.  More people are eligible to participate and deadline rules have been altered.  I have a new episode that discusses the new features and how you may qualify to participate, and you can find it by clicking here.


I’m glad you’re listening. Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

More Information

First-Time Homebuyer Credit Information Center

IRS Notice 2009-12 gives instructions for unmarried qualified homeowners

Image courtesy of Shutterstock

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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