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:

    @Tiffany: Because you will already be married at the time you purchase the home and your spouse is disqualified because of his previous homeownership, you, too are disqualified. You could have amended your return if you were not yet married and subsequently (even in 2009) became married. (In other words, if you purchased a home in June on your own and married in September – but not the other way around). Sorry – but congrats on the big lifetime events!

  2. Tiffany says:

    I thought I read in earlier posts because I was not married in 2008 and I will amend that tax return I would be able to get the credit. Being he is not on any of the paperwork or the loan for that matter.

  3. Michael says:

    @Tiffany: Review this IRS page. My interpretation of S1 and S4 is that you won’t qualify.

  4. Tiffany says:

    ok thank you for your help…i was told of course by the lender and the new home construction i would qualify

  5. carolyn davis says:

    I bought my house in jan 08 downpayment was paid on 23 of jan, do i qualify for the credit.

  6. carolyn davis says:

    I bought a house in jan 08, do i quality for the credit? What does the closing date mean?

  7. Lisa Reagle says:

    We purchased our home in August of 2008 but did not file for the tax credit in April 2009. Can we do it now just by filling out the 5405 and sending it in or do we have to wait until April 2010?

  8. Michael says:

    @Tiffany: How frustrating!

    @carolyn davis (x2): No, you can see the original post for the date restrictions. The closing date is the date you meet with the seller (and usually your respective representation), money trades hands along with keys.

    @Lisa Reagle: To get the credit, you must amend your 2008 return and add the Form 5405.

  9. Lisa Reagle says:

    What exactly must we do to amend our 2008 return?

  10. Michael says:

    @Lisa Reagle: You’ll need to file Form 1040X. Here’s a link. As I said above, you’ll also need Form 5405. Your return will be processed more quickly if you include a copy of your closing statement as well. Alternatively, you could use a paid preparer (like me).

  11. Phyllis says:

    I purchased a mobile home over 17 years ago for cash and have been paying rent for a space in a trailer park all this time. Am I considered a home-owner, so am ineligible for the tax incentive? I am in the process of buying a condo along with a non-relative and she is not eligible for it. Phyllis

  12. MikeY says:

    Hi, this question will probably sound dumb, but I am a returning vet with substance abuse problems and have been living in an appliance carton for the past several months. I have learned that I can obtain a VA loan and would like to use the tax credit on a used mobile home, but since I do own my cardboard home, I guess I can’t claim it. Is that right?

  13. Michael says:

    @Phyllis: Amber just asked the same question on another post. I’ll repost my answer here. It would be great if both of you took me up on my suggestion, to confirm or deny my thoughts on the matter:

    @amber: Technically a trailer home is a home, so if you own one, you’re not a first time home buyer for purposes of this credit. That said, it seems counter-intuitive. If I were in your shoes, I would contact the IRS directly and find out what they say. If you do so, I (and countless others) would certainly appreciate your putting their response here. Thanks and good luck!

    @MikeY: Among the requirements for a home is a bathroom. You don’t have one so I think you’re clear if you buy a home, including a mobile home. Note that the credit is the lesser of $8,000 or 10% of the purchase price of the home you buy.

  14. amber says:

    Thanks. So, what if the home/trailer was given to you, (left to you in a will for example) would you be disqualified even though you didn’t choose to own the home?

  15. Patty says:

    Is there no benefit whatsoever to someone who purchased their home in February 2008? I was shocked to see that two months made the difference between 7500.00 and nothing. How could this be fair to me as a new home owner in 2008?

  16. Lynn says:

    A young couple married in 2007. Only the husband’s name is on the title & mortgage. Wife has never owned real estate. Husband dies in 2008. Bank won’t allow widow to make mortgage payments (not sure why). Bank short sells the house (assumed owned by husband’s estate) to widow in Sept 2009. Does widow qualify for the credit in 2009?

  17. Michael says:

    @Lynn: No. Since the wife lived in a home during the last three years that her husband owned, she doesn’t qualify.

  18. Art says:

    I’m purchasing a house with a friend. His name is on the purchasing contract and the deed, but not on the mortgage itself (bad credit). Is he still eligible for the credit considering he’s not actually on the mortgage?

  19. Art says:

    Clarification: I bought a house with a friend. His name is on the purchasing contract and the title as a joint tenant, but not on the mortgage itself (bad credit). Is he still eligible for the credit considering he’s not actually on the mortgage?

  20. Michael says:

    @Art: Yes, assuming he meets all the other criteria.

  21. AMY says:

    I purchased my home in June of 2006. I did not work that year, and did not file an icome tax return, therefore a first-time homeowners credit was never taken. If I go back and file for 2006, would I qualify (I thought there was a credit for first-time homeowners back then). Or, does the fact that I made no income offset any credits I would be entitled to?

  22. Michael says:

    @Amy: There was no first time home buyers tax credit in 2006.

  23. Jasmine says:

    Brought a townhouse this past June and I also a first time buyer. Call the IRS today to find out the status of buyer credit and was told it was being audited. Because in my subdivision , we all have the same address but we have unit number. It can’t have an unit # because they think it is an apartment. I meant all the other requirements, but never know that I could not have an unit number. Have you heard of this happening before?

  24. Michael says:

    @Jasmine: I don’t know anything about problems with unit #s vs. apartment numbers but have heard that a good percentage of this claims are taking a long time because of suspected fraud. My guess is that you will only need patience before ultimately receiving your payment. Hang in there!

  25. Jasmine says:

    Thank you Michael.

  26. Lisa Reagle says:

    We finally completed our 1040E and 5405 form. Where do we now send the completed paperwork (along with a copy of our closing statement) for our credit and how long can we expect to wait to receive the credit? (This is for the 2008 version)

  27. Michael says:

    @Lisa: I suspect you mean a 1040X since that’s what’s required and there is no 1040E. The instructions will tell you where to mail the form (the address is based on your state of residence). Expect to wait anywhere between 12 weeks and perpetuity, based on the rumblings reported elsewhere on this blog. Include your HUD closing statement for better odds.

  28. PZ says:

    When I did my taxes for last year, I wondered why they asked if I bought a house after April 10. Now I know. We closed April 3. However, besides the initial tax refund I would have received last year, I don’t see that we missed out on much…besides the “time value of money.” Chances are we wouldn’t have invested it so no real missed money.

  29. JESSICA says:


  30. Michael says:

    @Jessica: You have a rather confusing set of facts so I might suggest contacting the IRS directly for guidance. I would say that if you were obligated to buy the home in 2008 and you moved in during 2008, it’s likely you’d qualify for the 20008 contact. But worth double-checking.

  31. Tom says:

    Is there anything out there for first time homebuyers from December of 2007, as far as a tax credit goes?

  32. Michael says:

    @Tom: There is no federal first income tax credit for homebuyers purchasing in 2007. You can check with your state to see if there were any incentives (highly unlikely.)

  33. Cheryl says:

    Hi Was wondering purchased a home in Sept 2007 we did a refi in 2009 can there be a first time credit and if so what year? Can we claim it this year or for 2008? Thanks so much

  34. Michael says:

    @Cheryl: Refinancing a home isn’t the same as buying a home, so now, you won’t qualify.

  35. Laura says:

    I wrote early today about the first time home buyer credit. I closed on my first and only home 3/2010, had an ammenment done with all my paperwork that my closing attorney told me to take, HUD-I, filed 1040X with the 5405. I had lived with my spouse, who bought that home in 5/2008. The ammendment was first of all improperly done; as they put my spouses name on it first, but he wasn’t buying or living in this home. All, of the paperwork I printed and was given by the IRS states I am a first time buyer, but because it has been denined due to the mistake. The IRS says I am not eligible now, it can’t be corrected. If, real FTHB’s can’t get the credit, no one should. They even stated that if I appealed, it would not go through. We really need to fix these loop holes because I know people get these credits through fraud. I am still floored that that nothing can be done.


  36. Michael says:

    @Laura: Not sure I followed you but if your husband owned a home within the last three years, you don’t qualify as a first time home buyer. It’s straightforward – one of the professionals should have advised you of that previously. Sorry that didn’t happen but know it isn’t because of a paperwork mix-up.

  37. Laura says:

    He bought the home in 5/2008, when I closed it had not been two years. The professionals don\’t know the rules because I had to reseach just to find out that his owning a home, would have made me ineligible if I had waited nine more months. I just want to know why it can\’t be fixed. I am a true first time home buyer, and eligble for nothing. As, he sits in his home that he is selling, that I want see a penny of because I only just bought a home. This is not the biggest scam thats going on in Washington, but it is one of them. I was told by the IRS advocate that she hardly ever sees the credits processed. She stated 1 in 5 go through, and she has yet to see a long time res. get through. That is the reason they are taking so long because to rules change monthly, and they don\’t want to give this money. Frankly, if you want to know the truth they don\’t have it to give. I was told it was the paperwork, but I was told I would have my FTHBC also. Thank you for your feedback. I welcome any. I spoke with the Georgia Gov. office yesterday because people should no all the facts when it comes to something this big. Next, I will call the parties running for that seat because this makes for politics and it should be fixed. No one should be denined because they\’re spouse owed something, if both people don\’t then they don\’t.

  38. Jacob says:

    Maybe we’re idiots for doing this without proper research, but all we knew about First Time Home Buyer Credit is that TurboTax, TaxCut, or whichever software we used for our 2008 taxes said we were allowed to claim it for our home purchase in Oct. 2007. Now we’ve just received a note from the IRS claiming we weren’t eligible and to provide documentation within thirty days or it will be “corrected.”

    Are we screwed? We’ll owe $7,500 back immediately because the tax software told us to enter it and the inept IRS sent us the money?

  39. Michael says:

    @Jacob: Yes, but try to fight the interest and penalty they’ll assess too. You should be able to get out of any penalty based on your explanation. Interest might be a tougher battle. Double-check your data entry for the program you used. If they made a mistake you might have recourse but, being totally candid, the mistake was probably your own, even if the wording left something to be desired. Sorry, just the messenger.

  40. Mike says:

    I purchased my mothers home in December 2008 and was given the credit. I just recently got notification from the IRS they are taking the credit away. Is that accurrate?

  41. Michael says:

    @Mike: Definitely. Buying a home from your mother has always been excluded from credit qualification. Sorry.

  42. Linda says:

    I used tubo tax in JaN 2009 TO FILE MY TAXES FOR 2008. I efiled prior to the changes being made in early 2009. I read everything that the progam had to offer about the firsttime homebuyers credit and it never said that if your spouse owned a home it could not be taken. IRS even told me I was due $500 dollas more and needed to file an ammended returrn if I wanted the exta $500. I even bought my house under the first time homebuyers program FHA. My realtor and lender said I qualified. I am being audited now and it seems that they may be disqualifying me because my husband owned a home. What now? Taxes, penalties, interest? Shouldn’t turbo tax be to blame somehow?

  43. Michael says:

    @Linda: Sorry for your frustrating experience. The law has always excluded married couples where one spouse previously owned a home. As such, you never qualified for the first time home buyer tax credit. You will certainly need to refund the improperly received credit and, quite likely, interest too. Be sure to write a letter explaining your situation and you just might be able to have any penalties waived.

  44. Tanaya says:

    My husband & I purchased our house in 08 or 09? We entered escrow in November 2008 & didn’t close until 2/6/09. For the tax credit purpose, what year would be the purchase year?

    We filed our 2008 taxes claiming the 2/6/09 purchase & received $7500. We received the 1040X in the mail stating we were eligible for $500 more than we received initially, however I’m still not sure about repayment. I don’t want to amend our return if I’ll be repaying the money later. Using HR Block tax software & Turbo Tax we needed to begin repayment this year, however as I read on the IRS site we wouldn’t need to repay. This is so confusing to us. Any help is appreciated! Thanks :)

  45. Michael says:

    @Tanaya: The relevant date is the date the transaction closed, or 2009. In your case, you should absolutely amend to get the extra $500 because you won’t have to pay any of it back. In short, the $7,500 (2008) credit must be paid back; the $8,000 (2009) does not. So go get the money.

  46. JR says:

    My Ex-wife and I purchased a home and recieved the 2008 tax credit. The money used to buy the home was left to her by her grandmother. The house was put in HER name only. And she used the credit to ofset any taxes she would have had to pay for the money. When we divorced less then a year later she kept the house and I signed off any right or claims I had to the house. I figured that included the repayment of the tax credit. I have just been told that I have to start repaying the loan. Is there anything I can do to transfer the tax liablity to her since I lived in the home for less then 6 months and she still owns and lives in it with her new spouse?

  47. Michael says:

    @JR: Ask her nicely to pay back the whole thing since she solely benefited from it? Sorry, but this is something you (or your accountant or attorney) probably should have worked into your separation/divorce agreement.

  48. Patty says:

    I purchased a home 12/19/2008 and took advantage of the first-time homebuyer credit on my 2008 tax return. Of course we all know that the 2009 homebuyer credit was much more advantageous, in that it didn’t have the repayment requirement. Can I amend my 2008 and 2009 tax return to take advantage of the 2009 provisions?

  49. Michael says:

    @Patty: Nope. Sorry.

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