Tax Credit Unveiled – or is it really just a loan to the consumer?
November 12, 2008
I’m sure you’ve heard about it by now, but do you really understand the new $7,500 first-time homebuyer income tax credit and how it works? I mean in-depth and practically? And do you also know how to make this new piece of legislation work for you? As long as your clients legitimately understand what they are getting themselves into, you can use this “credit” as a powerful tool to increase your business.
Before proceeding, I must clarify a few things. It makes me a little crazy every time I hear or use the term “credit.” You see, the entire initiative is administered by the IRS code, and “credit” is IRS terminology. It means that when qualifying individuals file their federal income tax returns, they get an actual income tax “credit” for 10% of the price of the home up to a maximum of $7,500. It’s only $7,500 when the home’s price is $75,000 or higher.
Let’s assume a qualifying couple purchase a $100,000 home between April 9, 2008 and June 30, 2009, and upon filing their federal tax returns are due for a small refund, say $300. Their $7,500 “credit” is tacked right onto the $300, and they end up with a pretty nice $7,800 income tax refund check.
Recapture
But that’s not the end of the story. This “credit” from the IRS must be “recaptured” over 15 years. Recapture doesn’t start until two years later, with payback at 1/15th of the full amount per year. Starting two years after their very nice check, Mr. and Mrs. Couple’s income tax burden is increased by 1/15th of $7,500, or $500 per year until such time that the IRS is paid back.
Now, doesn’t that sound like a loan to you? Agreed, the terms of the loan are fantabulous, with no interest due and a full 15 years and an additional two-year grace period to pay back. But in my book, a loan is a loan is a loan, which isn’t the same thing as a “credit.” And it’s a loan from the IRS, to boot!
Moreover, the (loan) recapture is accelerated if the home ceases to become the taxpayers’ primary residence or if the home is sold. The entire balance is due in the tax year of these occurrences. If the home is sold to a non-relative, however, the maximum recapture is limited to the gain on the home.
It is nice to know that the credit is forgiven for those homes sold at a loss. But as with everything that I cover here, always consult a tax accountant.
Who Qualifies and Other Facts
Other aspects of the income tax credit that I did not yet mention include that it applies to first-time homebuyers only. Under the law it is defined as having no ownership interest in a principal residence in the three years prior to the acquisition date of new home. If the borrower constructs their own home, count back from closing date or date of occupancy.
Ineligible borrowers include non-resident aliens; buyers who finance their home with tax-exempt mortgage revenue bond programs, where the home is purchased from a person who is related to the homebuyer, and a married person purchasing as an individual if the spouse is ineligible due to prior homeownership.
The credit is phased out for individuals with a modified adjusted gross income of $75,000 to $95,000, or joint filers with a modified AGI of $150,000 to $170,000.
If home is purchased in 2009 (prior to June 1, 2009), the borrower may elect to claim the credit on their 2008 tax return, and may amend 2008 returns if already filed.
Before I move on, I have barely scraped the surface of what you need to know, and believe it’s wise to read up further before you hit the streets. A couple of excellent resources are the National Homebuilder’s Association at www.federalhousingtaxcredit.com/faq.php or the August issue of my own e-zine, www.MortgageCurrentcy.com. Be wary of your sources, there’s a lot of misinformation out there. And above all else, remember that this is IRS tax code. Always defer to a tax accountant and do not offer tax advice.
Borrowers Short Funds
It’s time to make this credit/loan work for you. Think about using one of the following to get those difficult-to-come-up-with assets for those clients who are short funds:
* Scenario No. 1: the homebuyer borrows from their parents for downpayment, repays them with tax refund. With the Federal Housing Administration program, a loan from one’s parents is fully acceptable.
* Scenario No. 2: The homebuyer borrows from a 401(k) or other retirement plan. They repay in full with the tax refund. Neither Freddie (SS Guide Ch 37.16), nor Fannie (Selling Guide X. 603.15), nor FHA (4155.1 REV 5, 2-10, D.) require the monthly payment to be included in the debt ratio.
* Scenario No. 3: After closing, the borrower changes his/her W-4 withholding to recoup the credit immediately by decreasing the federal tax amount deducted from their paycheck. This can be very helpful to those who know they’ll be squeezed for money after closing.
* Scenario No. 4: Think ahead a few months to 2009. Immediately after the qualified homebuyer purchases, he or she goes to their tax preparer, files 2008 tax returns, and the credit is in his or her hands within minutes.
Realtor/Builder Business
This can absolutely help your Realtors and homebuilders increase their business. Create a handout with information that they need to know. (For a pre-prepared handout that you can personalize, visit Mortgage Talking Points at www.mortgagecurrentcy.com.) You’ll be surprised by how little most real estate agents and builders know about the credit.
Take it to the next level and bring the informational flyer with you to open houses. Take the time to put the property address of the listed house along with the Realtor information on the handout. Not only do you look good when the Realtor looks good, the flyer can be left at the home for future walkthroughs. It’s a great sales tool for the Realtor and the seller, so it’s likely to be left in the home. And it’s got your name and number on it when someone needs a question answered.
Mine Your Past Clients
This income tax credit is retroactive to April 9, 2008, including homebuyers who have already closed. It’s a great reason to stay in contact with prior clients and let them know that the credit exists, that they may qualify, and to talk to their accountant. And by the way, do they know a friend or family member who might benefit from the tax credit that you can help?
First-Time Homebuyer Classes
Create yourself a simple PowerPoint presentation for new homebuyers. Team up with an accountant, if possible, and market the class based on the tax credit. I’m sure the many accountants know clientele who may be very interested. Heck, team up with a Realtor and further increase your audience.
Don’t make it complicated, and please, again, put disclaimers on everything.
Leslie Petersen’s Disclaimer
I am not a tax accountant. I am not an attorney. I cannot offer legal or tax advice. I did spend an enormous amount of time researching and investigating the tax credit/loan that I’m covering today, but I do not represent the IRS. I cannot offer guarantees as to the accuracy of anything represented here.
To Your Success
Having said that, I legitimately want to see you succeed at what you are doing. I’ve barely scratched the surface. As mortgage brokers, you must be educated, and to thrive in this business, you must also be educators. The public knows little to nothing about the first-time homebuyer income tax credit. It’s new and thrilling information, and you can be their resource.
The first-time homebuyer income tax credit/loan is a powerful marketing tool and the window of opportunity is narrow. Use your expertise to attract new clients. Whether or not the credit/loan is right for them, you’ve still established new relationships and future business.
Leslie Petersen is a mortgage guideline expert. With over 30 years experience in mortgage lending, she writes an online newsletter, www.mortgagecurrentcy.com, on the changes in Fannie/Freddie, FHA, VA and other regulatory agencies, but with a twist. For originators, underwriters and managers, she also interprets them in plain English and shows them how to make the rules and changes work for them and get more of their loans approved. She can be contacted at leslie@MortgageCurrentcy.com.
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