Long Beach, MS

Scenario regarding First Time Homebuyer tax credit:

I recently viewed an example of the tax credit which I thought would help explain the credit. Remember it is an EXAMPLE only:

Home Purchase: Sam, a first time homebuyer closed on a property in May 2008. He used Down payment Assistance and the seller paid closing cost.

2008 income tax return: In March, 2009, Sam takes his folder to his accountant to complete his tax returns. His refund was going to be $1,000 - but because he qualified for the $7500 first time homebuyer tax credit - the refund is $8500.00 The money is in his pocket within a month.

2009 tax returns: Early 2010, Sam takes his folder to his accountant and gets a $750.00 refund. He changed his deductions to pay the IRS less each month since he receives the benefit of his new home interest deduction. Note the recapture for the tax credit has not started yet.

2010 tax returns: Early 2011. NOW, Sam must start the recapture period by "re-paying" the $7,500 back to the IRS at a rate of $500.00 per year. He would have received a $750 tax refund, but now he only gets $250.

Future Tax Returns: He must continue re-paying the IRS $500 per year in the same manner for a full 15 years, or until it is accelerated. If it is accelerated, he may have alarge tax bill that year.

Now Sam could use his $7500 windfall in 2009 to help his brother buy a house . Then his brother will qualify for the $7500 credit as long as he buys before 7/1/2009. The brother can re-file his own tax returns and get the credit refunded immediately and re-pay Sam.

Note: A Homebuyer can borrower from a 401K or other retirement plan, repay it in full with the tax refund. Neither Freddie, or Fannie, nor FHA requires the monthly payment to be included in the debt ratio.

*The assumptions in this scenario are based on the full $7500.00, whereas the credit is 10% of the purchase price when it's less than $75,000.00. Also using normal income limits scenario Single 75k annual, and 150 joint.

This is a one-of-a-kind deal for a * $7500.00 loan. There is absolutely no interest and the homebuyer can take a full 15 years to pay it back. The tax burden is only increased by $500 per year, after skipping a year before repayment starts.

None of the above was reviewed by an attorney nor accountant and the interpretation is not guaranteed. Consult legal and financial counsel for further information.

KS