$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.