Congress passed landmark legislation by way of the Housing and Economic Recovery Act of 2008. The centerpiece of this legislation is a tax credit of up to $7,500.00 for first time homebuyers. A first time homebuyer is defined by the law as a homebuyer that has not owned a principle residence during the three year period prior to purchase. Married couples must both meet the first time homebuyer criteria to be eligible for the tax credit.

Gross Income of $75,000.00 or less for individuals, or $150,000.00 or less for married taxpayers. Those exceeding these limits may be eligible for a lesser tax credit.

The tax credit is refundable which means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. For example, if a taxpayer owed tax liability of $1,000.00 without the credit, they could expect a refund of $6,500.00 after the credit was applied presuming they qualified for the full amount.

For homes purchased in the 2009 calendar year, homebuyers will have a choice as to whether to apply the credit to their 2008 or 2009 tax returns. Your tax consultant should be consulted to help you determine which year would be more advantageous.

Homebuyers should be aware that the tax credit must be repaid to the government over the course of 15 years, or when they sell the home if there are sufficient capital gains from the sale. There is no interest on the credit so in that way the tax credit acts as more of a zero-interest loan. Additionally, homebuyers are not required to begin paying back the credit for two years after the tax credit is claimed. After those two years, $500.00 per year would be paid back, presuming a full $7,500.00 credit was claimed.

Although the tax credit must be repaid, it is still of significant benefit to first-time homebuyers. This infusion of cash to the homebuyer during the year of purchase will increase affordability by reducing potential mortgage amounts. By not having to finance an additional $7,500.00, homebuyers could potentially save $8,100.00 in interest payments presuming a 30 year mortgage at a 7% interest rate.

If you have not owned a home in the past three years, this tax credit provides excellent assistance to increase your affordability. Now is a great time to buy as interest rates are still low and there is ample inventory from which to choose. Consult your local real estate professional and your tax consultant to see how this tax credit can work for you.