This article is about the initial first-time home buyer tax credit.  It’s an important read if you bought your first home in 2008.  If you purchased your home during 2009, read about the 2009 First Time Home Buyer Tax Credit.

If you haven’t purchased your home yet, be sure to read about The new, enhanced, home buyer tax credit.

Not surprisingly, government has found another way to make something that could be so simple so very complicated.

You:  How so this time?

The relatively new first-time homebuyer tax credit.

You: Did this just come out because of the most recent financial crisis?

Actually, it came out a few months ago before the most recent financial crisis.  But it was definitely added in response to falling home prices.  Here’s what you need to know:


In order to be eligible for the first-time homebuyer credit, you must meet the following conditions:

  • You must buy a principal residence (not an investment property or a second home) after April 9, 2008 and before July 1, 2009.
  • If you file single or as head of household, your modified adjusted gross income must be less than $95,000 to receive any credit (and less than $75,000 to receive a full credit).  If you’re married, those two numbers increase to $170,000 and $150,000 respectively.
  • You must not have owned a principal residence during the last three years. Same is true for your spouse, if you are married.

Provided you meet all of the conditions above, here’s what the credit means for you:

Show Me The Money

Since the credit is 10% of your home’s purchase price but is subject to a maximum of $7,500, anyone who purchases a house costing $75,000 or more and meets the criteria above receives the same $7,500 credit.  Note, however that the credit is refundable. That’s huge.

You: Why?

The fact that the credit is refundable means that you can get the full $7,500 even if your total tax liability was less (or even zero). Many other credits are only actually payable if you would otherwise have a tax liability.

You: Okay, now in English.

Say your tax liability for the year is $1,500 and you had $2,000 withheld.  Ordinarily, you’d receive a $500 refund.

You: Easy enough.

Now, say that you’re eligible for the first-time homebuyer tax credit but that the credit was non-refundable.

You: But it is refundable.

Yes, but I’m trying to provide an example so you can understand the importance of the “hugeness.”

You: Right.

If it were non-refundable, your tax refund would increase to $2,000 because the credit would reduce your income tax liability to zero, providing you with a full refund of the entire amount you had paid through withholding.

You: But since, it’s refundable . . .

You get more.  In fact, you get the whole $7,500 credit.  The first $1,500 of it wipe away the tax you’d otherwise owe and the next $6,000 becomes “refundable.”  Plus, since you already paid $2,000 through withholding, the refund you’d actually receive would be $8,000.

You: That’s a huge refund.

Pun intended?

Then, The Government Takes It Back. Slowly.

You:  I don’t like the sound of that.

You shouldn’t.  What happens next makes the credit not really a credit and more of an interest-free loan:

Over the 15 years starting two years after you claim the credit, you have to pay 1/15 (or $500) back to the government each year.

You: What?  How?

You have to pay the credit back through a $500 reduction in your refund or a $500 increase in the amount due on each of 15 consecutive tax returns.

You: That doesn’t sound like a credit – it sounds like an interest-free loan.

It is. It’s just like the interest-free loan some people give to the government every year because of consistent over-withholding on their paychecks.  But this interest-free loan is a good thing because it’s you are the one who is not paying interest.  To be sure, an interest-free loan is not as good as a pure credit that you get to keep forever, but $7,500 is still a nice chunk of change in the form of an “interest-free advance” for the nominal effort of claiming it, if you are eligible.

Note, if you sell your home before the 15 years are over, you owe the remaining balance when you next file.  If, however, you sell your home for a loss, the government eats the remaining balance.  Same thing is true if you die before the 15 years are up.

You: They actually considered my potential death that when writing the law?

I wouldn’t say your death specifically but death in general:  yup

According to the web site Federal Housing Tax Credit, you could save over $8,000 in interest payments compared to likely alternative of financing the full $7,500 over 30 years  One last thing: if you know you’re going to qualify, don’t wait until April to get your money. Adjust your W4 at once or you’ll be giving the government an interest-free loan on the interest-free loan they are trying to give you!

UPDATE: Read more about the 2009 First Time Home Buyer Tax Credit here.

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199 Comments to “First Time Homebuyer Tax Credit: When a credit isn’t a credit but it’s still free money”

  1. Michael says:

    @Mike: That’s certainly a reasonable position to take.

  2. Chris says:


    I was filing for my taxes yesterday, I purchased my first home 4/18/08 then ended up selling it before the years end – I spoke to the tax lady to see if i qualify for any 1st time home owner credit and she listed me down to take the $7500 credit… Geeez now reading more about the program this loan would be paid back at the closing date… so now Im stuck? filed incorrectly and risk more chance of being audited… What do I do? will this even flow through there system???

  3. Michael says:

    @Chris: It would have been cleanest to simply not have taken the credit. Now that you have, you’re going to have more work to do. I’d wait until you get your refund (assuming this credit created a refund). Then, I’d amend your tax 2008 tax return and take the credit off and send in a check for $7,500.

  4. Chris says:

    Thanks for the prompt responce, So I will fill out that form and send back with a check – I owed roughly $1800 so thought that helped but knew something was wrong – you would think doing taxes for a living you would know this info? Gosh just makes me nervious is all

  5. Matt says:

    I purchasd my first home in August of 2008, applied for the tax credit on my 2008 return and received the credit.

    Now I am in the process of selling my house and wondering what the government will consider the final purchase price of my home, less realtor fees. For instance, I owe $68,000 on the home. If the home sells for $80,000, the realtor will take approx. $5,600 (6%) and after other expenses my net proceeds from the home will be approx. $4,500. Will the sale price be considered the original $80,000 before expenses and realtor fees? Obviously, if so I would not have enough left over to repay the credit solely from equity proceeds.


  6. Michael says:

    @Matt: Up to the full amount of the credit you received (up to $7,500) will need to be paid back when you file this year’s tax return. How much will depend on whether you have a loss or a gain. Since you haven’t indicated your purchase price, I don’t know if you have a gain or loss. However, I can tell you that your sales price is $80,000 in the case you described above. If you bought it for more than $80,000 then some of your credit may not have to be paid back.

  7. Matt says:

    Michael: The purchase price was $69,000 and my credit was $6,900. My concern lies in what is considered the sale price. Are realtor fees included in the “sales price”?

    If the home sells for $80,000 and realtor fees are $5,000, would the “sales price” be considered $80,000 or $75,000?

    In a second scenario, if the home sells for $75,000 and realtor fees are $4,500, would the “sales price” be considered $75,000 or $70,500?

    If the “sales price” is calculated “pre-realtor fees” then I would owe more of the credit back at tax time in each scenario. If it is calculated “post-realtor fees” then I would owe less of the credit back, and would also be more inclined to reduce the price for a quick sale (the home has been on the market for 2 months with very little interest).

  8. Michael says:

    @Matt: This is a specific detail question which you might want to verify with the IRS, but I am fairly certain that any real estate commissions you pay reduce your profit, so if you sell a home for $80K and pay a commission of $5K to do so, you have a net selling price of $75K. You compare that to your basis to determine the taxable gain, if any.

  9. Matt says:

    I verified the detail above. It also appears from the portion of the legislation copied below that the adjusted basis is reduced by the amount of the credit. Would that make my adjusted basis $62,100 (69,000-6,900)? If so, assuming that the house sells for $70,000 net, am I correct that I would be responsible for paying back the entire credit? It appears that it may be wiser to reduce the price and break even on the sale to avoid paying the credit back, and I may have to begin documenting improvements to increase the adjusted basis.

    `(3) LIMITATION BASED ON GAIN- In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1).

  10. Michael says:

    @Matt: That makes sense. If your net cash expended (after taking into consideration the credit) was $62,100 and you (after subtracting out the commission) net $70,000, you clearly didn’t lose money on the property. Rather, you gained. As such, you can’t avoid the credit recapture. A somewhat lower selling price would not cost you any money since it would reduce the credit repayment required. Just another ironic twist of a tax credit designed to sure-up the real estate market, no?

  11. nicole says:

    My husband purchased a mobile home a few months before we married..(he purchased it cash- no loan needed). We rented the land from the previous owners. Now he sold the mobile home in May as I understand (from Marc’s situation) he will not qualify for the $8k…but since I was not on the TITLE will I be able to qualify? I had nothing to do with the purchase or sale of the house on wheels

  12. Michael says:

    @Nicole: If/since your husband doesn’t qualify, you don’t qualify. Either the entire married couple qualifies, or the entire married couple does not.

  13. Adam says:

    Michael, I have a complicated situation. I inherited a house along with my two brothers from our mother. I do not live in the house. I would like to buy the two brothers interest in the house and claim the $8,000 tax credit. Do I qualify or does this fall under inherited property. I didn’t know since I don’t technically have a principal residence. Thanks for your reply

  14. Michael says:

    @Adam: You’re right in that this is a complicated situation. Buying a home from a brother (or two) is not considered a related party transaction which would exclude you. However, if you already own the home (since you inherited it), and therefore your name is on the title, you’re not technically buying a home. Yet, you haven’t lived in it, so I suppose you can argue it was an investment property and now you are buying one as your principal residence for the first time.

    Sound kind of mushy? It is. I suggest getting with a CPA or calling the IRS directly. Sorry I can’t answer this question more concretely.

  15. Sherrie says:

    Question about the tax credit…
    I am currently living in house that my husband owns. His name only is on the mortgage, my name is not on anything related to the house, so essentially, he owns it and I have no claim to it. We are getting divorced and selling the house. Once divorce is final, if I buy a house, will I qualify for the tax credit?
    I think since I don’t own the house and we will be divorced, I would qualify, but I don’t know how the law sees it.

  16. Michael says:

    @Sherrie: If you buy the home after you divorce is finalized, you should be able to take the credit based on my understanding of the facts you have presented.

    That said, I’d expect unfriendly correspondence from the IRS after you file since it will look to them (based on your 2008 tax return) like you’ve been a home owner just recently. You may wish to call them (the IRS) in advance to verify what I am saying if you’re counting on the credit.

    Good luck!

  17. marisa says:


    I had a question about the $8000 tax credit. I am divorced and currently renting from my ex (he had a lawyer draw up a lease)the home my ex-husband and I lived in while we were married. The mortgage was always in his name only, but I believe since we were married I had to be on the deed. In our divorce settlement he was awarded the house. Our divorce was final in August 2007, and I have been renting from him since then. Will I qualify for the first-time homebuyer credit since I never actually bought the house? I would occasionally have to call the mortgage company when we were married, and they wouldn’t even give me information on the payments, as they said by law, since I wasn’t on the mortgage they could not give me any information. And they would say, that even though I was his spouse, I had no access to information regarding the mortgage.

    Thanks for any light you can shed on this subject.


  18. MIKE says:



  19. Michael says:

    @Marissa: Your question is nearly identical to Sherrie’s (right above yours) except you’re less certain of whether or not you were on the deed of the home while you were married. If you were on the deed, you’re out of luck for this credit since you owned a home as recently as 2007. If you were not on the deed, follow the advice I gave to Sherrie.

    @Mike: I’m actually not sure. I can’t find any guidance on this and as such it’ll make sense for you to contact the IRS. If you do, we’d all appreciate you sharing with us what they told you. My gut says that if this is for a day or two, no big deal and you’re probably okay even though I can’t swear by it. If this is a several month thing, you’re probably not going to get the credit because now you’ve bought an investment property, not a principal residence.

  20. angel says:

    I know of many people claiming this credit when they haven’t even closed on a home. They are amending their 2008 returns to claim the credit and then pocketing the money. How are they getting away with this? Isn’t this fraud/ilegal? What are the consequences? I would imagine at a mimimun they would have to pay back the IRS with interest and should sort of penalty.

  21. Michael says:

    @Angel: Lots of people cheat on their taxes. Many get caught. I confidently suspect all do not. The first time home buyer tax credit is just another “opportunity” for the less scrupulous.

  22. angel says:

    Michael, Thanks for the reply.
    Another question/comment: Do you know if the federal government/IRS is checking local governmental property records to determine if at least these people are acutually listed as owners on the house? Do they require a settlement/HUD statement before giving the credit? If not, shouldn’t they or would that make to much sense?

  23. Michael says:

    @Angel: You’re welcome. As you know, I don’t work for the IRS, so I can’t tell you what they’re doing behind the scenes. They don’t require you to submit anything more than Form 5405 to get the credit. Our tax system is ultimately based on voluntary compliance. So our the rest of our laws. There’s always a few bad apples out there, but I’m not really sure there’s much you and I can do about that. I suspect that if the IRS begins to worry about widespread cheating, they will begin to implement (if they’re not already) some of the suggestions you mention.

  24. Paul says:

    do you have to go thru a bank or can you do a land contract and sill qualify

  25. Judy Hall says:

    My brother and I inherited a home last month and I am buying him out of his share. Do I qualify for the first time home buyer credit? Loan should close in a couple weeks.

  26. Michael says:

    @Paul: The type and/or existence of financing is irrelevant. However, you must buy a home, not just land, to qualify.

    @Judy Hall: No. You can’t buy from certain related parties and a brother is a related party.

  27. donna says:

    what if you owe IRS can you still claim the credit

  28. Michael says:

    @Donna: Sure, though you might not see the money (depending on how much you owe from prior year’s). Still, the credit can create money that can be applied to reduce the amount you owe from a prior year.

  29. John says:

    Hi I have a question: My fiancee and I bought a new house on December 18, 2008. When I applied for the first time home buyer credit, I notice that there is a paragraph on the form 5405: “If you constructed your main home, you are treated as having purchased it on the date you first occupied it.” I am confused with the word “construct”. We did remove the carpet in the living room and change it to hard wood floor, and we moved into the house on January 9th, 2009. Are we qualified for the $8000 credit? A friend of mine said I might not qualify for $8000. He said “construct a house” means something like tearing down the building and rebuilt another one…

    Thank you for your time!!

  30. Michael says:

    @John: They’re talking about building a new home not doing some renovations of an existing home. If you buy a home from someone else (not a developer), the magic date is the date you close, not the move-in date. If you’re building a new home, then it’s the date you move in.

  31. Mike says:

    Michael, thank you for sharing your time and expertise helping us understand this credit.
    I didn’t run across my scenario above, so here goes:
    In December 2008, I moved out of a house that is owned by my ex-fiancé. She, incidentally, is a tax professional (still trying for her CPA) and so she prepared my 2007 tax return. On that return, she allocated mortgage insurance to me using a statement to schedule A, ” Home Mortgage Interest paid to individuals/Form 1098 Received by other than taxpayer,” even though I’m not on the loan or the deed. Only her name is on the 1098. However, I did pay an equal share of the mortgage, insurance, and property taxes.
    Now, I’m closing on a house next week and I do qualify for the tax credit, but I’m concerned that it looks like I’ve already owned a principal residence.
    Based on this scenario, should I go ahead and claim the credit (and expect an audit), or would I need to amend my 2007 return to exclude the MI deduction?
    Thanks in advance!


  32. Michael says:

    @Mike: I’d agree. Since you name wasn’t on the title you didn’t own the home. That said, you shouldn’t have deducted the mortgage interest or property taxes at the time, since your home wasn’t on the line for the mortgage (your ex-fiance’s was).

  33. Mike says:

    Thanks Michael!

  34. Amber says:

    Hi, Just wondering if we did a land contract from our inlaws would we still qualify for the 8000 tax credit? Not able to find any info on this and answers would be very helpful. Thanks!

  35. Michael says:

    @Amber: probably not for two reasons: 1) title has to pass, and it typically doesn’t in a land contract 2) in-laws are your spouse’s parents and parents are excluded as a related party.

  36. MP says:

    My husband and I filed jointly this year for our tax return, last year I closed on a house at the end of April, we were married in May, I never owned a house before, living with my parents, but He owned an apartment that he used as primary residence. The mortgage is in my name solely since we were unmarried when purchased, I was under the impression that I was eligible for the credit, but now the IRS is completing a more thorough review of our return. Was I mistaken?

  37. Michael says:

    @MP: Since you were unmarried at the time of the purchase, your husband’s status as a former homeowner should not count against you, even if you file a joint return. (It definitely doesn’t for the 2009 version, but you’re trying to qualify for the 2008). It could just be what they’re telling you: that they’re doing a more thorough review. Apparently, there are many people not following the rules, so the IRS has slowed down the speed at which it is paying out the credit. Hang in there.

  38. Roger says:

    Michael: Very much appreciate all the helpful advise posted here. One poster asked about U.S. Code Title 42 definitions as they might apply in the case of a mobile home not considered as a principal residence. I did not see an answer regarding that, so do you think the IRS would just dismiss that section of federal law if it was used as a basis for claiming the credit? Thanks.

  39. Michael says:

    @Roger: Thank you for the kind words. Unfortunately, I haven’t seen anything that permits mobile home owners to ignore such ownership for purposes of becoming eligible for this credit.

  40. Sarah M. says:

    We purchased a home in 2008 and received the tax credit. We have only lived in the home for a little more than a year, but now my fiance’s hours and pay have been cut and we can no longer afford to keep it.

    Our options are to sell at a loss (our home is no longer worth what we paid), in which case we will NOT owe the 7500. But we would prefer to wait it out and keep the house and rent it until the economy and home prices go up at least a little bit. We can only rent it for about half of what our mortgage payment is, in which case we will be making up the difference ourselves, but it will no longer be a “primary residence” as we will most likely be moving to another city (or state) so he can find more stable work.

    Are there any possibilities for us to NOT have to pay back the 7500 immediately upon our move? It is virtually impossible for us to pay right now anyway as our savings is sapped at this point.

    We are also considering foreclosure.

    Any thoughts would be appreciated!


  41. Michael says:

    @Sarah M: Sorry about your circumstances. Regarding your 2008 credit. Remember, you’re going to have to pay back this money no matter what – that’s the nature of the 2008 credit. Sure, it’s preferable to pay it back over 15 years than over one (not to mention more affordable), but you’re going to have to pay it back.

    By selling the home at a loss, you don’t have to pay it back, as you indicated. Don’t let the credit drive the decision. Let your cash-flow drive the decision. If you think the home will appreciate in value quickly (which isn’t happening in too many places these days), then hold on to it. Of course it’s more likely it’s gone down and could take years to recover. If you can’t cover your monthly costs, you could just be making a bad situation worse.

    Net: the first time home buyer tax credit is of relatively small financial concern compared to the dollars involved in your other decisions (whether to rent, foreclose, short-sale, etc.)

    Good luck!

  42. Tink says:

    I have seen a few posts of people in my same boat. My fiance and I purchased our home in March 2008 and missed out by a couple of weeks…. OUCH! A friend who i recommended to our real estate agent purchased her home a month after mine and she got the 8000 and I got nothing because I was a few weeks early. Is their no way around this? And how did someone come up with that specific date? I had my taxes done professionally and the man had worked it up so I would get it but when his co worker reviewed it he told the man I was not eligible so that hurt to hear i was getting it then be let down like that. Any ideas?

  43. Michael says:

    @Tink: Sorry you missed out. Anyone who bought a few weeks after you could have qualified for the $7,500 version described in the post above, not the $8,000 version. There’s more at stake than $500 – the $7,500 version has to be paid back; the $8,000 does not.

    The dates were set by Congress during the legislative process. The idea was to stimulate the housing market and as such was deemed applicable only to sales that had not yet occurred.

  44. Steve says:

    Michael — This a great site with a lot of useful info. Hope you won’t consider my question frivolous, but I am trying to purchase an older, very modest property and would be greatly helped by the tax credit, if I could get it. Unfortunately, two years ago, I lived in a beat-up trailer that I bought for $500 and was told to abandon by the local authorities. Do you think there is any possibility the feds would discount this as a principal residence? Thanks.

  45. Michael says:

    @Steve: Thank you for the kind words. Your question is far from frivolous. Technically, you owned your personal residence within the last three years and therefore don’t qualify. It pains me to actually write that sentence, as it is clear the laws exclusions weren’t meant for you. Nonetheless, that’s how I read it. As to how the feds will react, I do not know. Keep in mind, there’s a good chance (in my opinion anyway), that the government will extend the credit. If they do, you might reach the three year limit before too much longer.

  46. Mary Kate says:

    If I already filed my 2008 tax return, but am eligible for the 7500 credit/loan, can I still receive it?

  47. Michael says:

    @Mary Kate: Sure! Just file an amended return. Get Form 1040X from the IRS web site.

  48. Kevin says:

    Okay, I think I know the answer to this, but just in case….I was renting a room from a friend in his home. I inherited a bit of money and offered to help him upgrade the house. It was about $10,000 so he put me on the deed until he could pay me back. About 18 months later, he paid me back and I Quit claimed on his deed. I never paid ANY taxes on the property, have never had my own mortgage, either. Now i need to buy a house and it will honestly be my own first house, but it sounds like being on that deed for 18 months ruins it for me.

  49. Michael says:

    @Kevin: Assuming you got off the deed less than 3 years ago, I tend to agree.

  50. Tiffany says:

    I am closing on my home on Sept. 3 and I will be a first time home buyer. I was married June 21. My husband owend a home in 2007. I was not married to him then. My name only is on the loan, deed and mortgage. If I amend my 2008 taxes when I was not married can I claim the first time home buyer credit. Is this legal or will I be audited in 2009 when I claim married.

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