$7,500 Tax Credit or Second Loan?
As if consumers didn’t have enough loans to worry about, the US government seems to feel as if potential new homeowners need yet another way to leverage their future. As part of the housing bill signed earlier this summer, any US citizen earning $75,000 a year or less and have not owned a home in the last three years will be eligible to receive $7,500 from the government in the form of a “tax credit” if he or she purchases a house between April 9th 2008 and July 1st 2009.
This sounds like a great deal, but is it? The pictures on the home page of the website dedicated to promoting this credit suggests that it’s a great opportunity, but the problem is that this tax credit is unlike just about any other you have seen in the past. Normally, a tax credit is an amount of money that offsets your tax bill. If by chance you owe less tax than the credit, the federal government will send you the difference as if you are receiving a refund. However, in this case, recipients of this particular credit must start to pay it back two years after receiving it, $500 a year, over 15 years!
To make things even worse for potential homeowners, you receive this money when you turn in your year-end taxes, not when you close on the sale of the home. The potential is there for people to collect this money long after they have closed on the sale of their dream home and use the money for any number of unrelated things (sounds like a home equity line of credit to me). Two years later, the homeowner now needs to start paying back the government for the next 15 years. Now I don’t know about you, but the IRS is about the last institution I want to be indebted to.
It remains to be seen if this provision meant to increase the affordability of homes for middle class buyers does more harm than good. We’ll likely have to wait at least until 2010 to find that out.
Ethan John said:
How is this a bad thing? A $7500 loan with 0% interest over the course of 15 years for essentially first-time home buyers with lower-than-necessary income? I’d say that sounds a hell of a lot better than the same $7500 loan from a typical institution.
The IRS isn’t going to be very nice with late payments, but they’re not any worse in that regard than any of the nearly-loan-shark companies out there.
August 20, 2008 6:53 AM
James said:
The government will do anything to keep this ponzi scheme afloat. Our entire economy has been based on over-priced real estate. They only people telling you things are fine are those who have the most to lose by people not buying. Greed will always come back and bite you in the a$$.
August 20, 2008 8:41 AM
Bill said:
I think this type of an incentive is excellent to sway a first time home buyer and add good news to the buying experience.
So many negative opinions are forcing renters to be renters forever. The increased tax benefits of homeownership will offset any type of a bill as it will create a larger write off… As far as the $7500 this would be great to split up between a married couple and invest in a Roth IRA.
So just to make it fun if a 25 yr. old first home buyer were to take $7500 and invested it in a ROTH IRA today with an 8% annual average earnings and was to retire at 65 they would have $162,934 or $282 a month for the rest of their life.
The other thing about this is that it will be used to offset the removal of the Down Payment Assistance that will be removed next month. Family members will be able to gift the 3% and will have an exit strategy to pay them back if needed.
August 25, 2008 4:23 PM