Profile picture for Clearpoint

$7500 tax credit, smoke and mirrors or an advantage?

The majority of my clients will not benefit or even qualify for this credit. However indirectly they may benefit if it gets the market moving, so I was hoping for some insight from those that think it will benefit their first time homebuyer clients and how? Being in one of the lucky ground zero states any help will be good but with credit tightening, and MI companies reducing availability I just wonder if an incentive is going to help, especially one that is essentially just an interest free loan.

  • September 02 2008 - US
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Be a Good Neighbor. Be respectful and on-topic. No spam or self-promotion! See our Good Neighbor Policy.

 
 

Answers (35)

(Sound of can of worms being opened...)

  • September 02 2008
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Profile picture for OnePawUp

This interest free loan didn't make me to decide to buy a house and in fact it didn't even come into consideration but I will most certainly claim it on my taxes this year!

  • September 02 2008
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Profile picture for FatNoah

Personally, I don't think this is going to cause anyone to buy a house since it's just an interest free loan and not a credit.


That said, I'll claim as much of it as my income will allow and stick it into a high interest savings, IRA, or my son's college fund.

 

  • September 02 2008
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I do not know all the details about it but if what I heard is true and you can claim it with you 2008 taxes on a house you buy in the begining of 2009.  Therefore you can have the money in your pocket when you close on the house.  I would think that would kick start the 2009 season pretty well. Especially with those houses in the $200-250k range where you closing costs would not total the $7500.  The fact that it has to be paid back, I do not think will concen too many.  Unfortunately no one looks down the road these days.  Probably why we are in the mess we are in now.

  • September 02 2008
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Profile picture for Clearpoint

I don't see it as an incentive to a purchase though it may be an added bonus to those that were going to purchase anyway. 

 

OnePawUp, did you adjust your income tax withholding so you can see some benefit now or are you going to wait until you file?

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I do believe the $7,500 can be an incentive to some people, but not everyone.   To get the market moving or thinking about buying a home,  I do like it.   

 

Also, I have not seen it mentioned here but I do believe there is a provision that the unpaid portion of the Loan/Grant/Gift is forgiven if the property is sold in an arms length transcation at a loss.   There was something about this in the announcment if anyone has details on that provision.   Please post it.  It might offer some protection or incentive if property values decrease.    Maybe?????   Would have to see the entire rule.

  • September 02 2008
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If the gain on the sale is less than the amount that must be repaid, part of the liability is forgiven. For example, if the individual still “owed” $4000 but the gain on the sale was only $3500, then the seller would not be required to repay the IRS the $500 shortfall. If there was no gain or even a loss, then the remaining $4000 would not be repaid.

 

Source

 

 

  • September 02 2008
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I don't understand all this talk about "Interest Free" Loan.  If I give you $7,500 today and ask you to pay back $500 per year for 15 years, when you factor in inflation at 2-3% per year, you pay back far less than $7,500 in "2008 dollars". 

 

If it must be called a loan I would call it a loan with an interest rate of negative 18 percent.

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You will also gain the write off of mortgage interest which will more than make up for the interest free loan payment.  This is absolutely a great thing for the market.  A buyer can receive a gift for $7,500 and repay it upon receiving the credit/refund. 

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Gregoria -  That is my understanding.  You said it nicely Thanks. 

 

SanDiego- I would have to do the math to come up with the negative 18% rate.   But I understand what you are saying.   I believe the comment was about hype versus reality.   Regardless, for whatever reason if it gets people thinking of buying it is a good thing, provided they understand the ins and outs of the loan and not just the promotional hype or spin that is added.     MY OPINION

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Profile picture for harryh66

Does anyone know if it will it only kick in if you owe taxes, or can it result in a refund?

 

I heard it depends on where on the return the IRS decides it goes.

  • September 02 2008
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Gregoria??  lol

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It is credited against taxes that you might owe, or will result in a larger refund.

  • September 02 2008
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Little Greggie has a new nickname

  • September 02 2008
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Harry, if the credit exceeds your tax, you get a refund.

 

Bradford, I just pulled the negative 18 out of a hat, didn't feel like compounding and amortizing a projected inflation.  I think this is a good thread, I didn't mean to sour it, that Interest Free loan thing is just a pet peeve of mine.

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Some of us think it's actually one of the first positive things this current administration has actually done to assist the housing market.  But ... don't speak of it to your borrowers, it will make you look like a "used car salesman" rather than an informed professional that is looking out for the best interest of your clients.

 

 

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Profile picture for Clearpoint

I heard AZRob loves it, uses it, and endorses it.

 

I like it, I think individuals could take advantage of the credit early by adjusting their payroll tax withholdings and see the savings sooner.

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Sounds like we should have 'Georgia' and Rob meet!

  • September 02 2008
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Homey don't play that!

  • September 02 2008
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Was waiting for someone to correct ClearPoint...    After they get the $7,500.    They owe an extra $500.00 each year..   so they would have to "start paying for it" in 2009 instead of "seeing the savings sooner"  They make the first $500.00 payment when they file their 2009 Tax Return.    

 

From a Marketing standpoint I may promote it more in January because they can buy the house in January, File their taxes and get the money they spent for the downpayment and closing costs back quickly.   That would be different than making the purchase now (September) and waiting till January 2009 to file their taxes and get the money then.     

 

I do know it is a loan and would explain that to my clients.  

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Profile picture for Rob Cochems

Tim,

 

FYI you don't have to start repaying it until two years after you claimed it.  It really is a 16 year loan.

  • September 02 2008
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Profile picture for Clearpoint

What?  How do you figure that?  They do not start paying until 2010, 2 years after their tax returns.  By adjusting their current withholdings they are reducing the amount taken out of each check and will be trying to get as close to a zero tax return.  The actual credit is not applied until that tax year.  Pretty simple, you should always adjust your withholdings so you get as close to zero as a tax rebate.

 

 

  • September 02 2008
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  • September 02 2008
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Rob,    I could be wrong.   The first payment is in 2010, when you file your 2009 tax return.    IF they buy the first part of 2009 they can declare it on their 2008 tax return.    Again, I could be wrong, but that is the way I read it.  

 

ClearPoint,  they would be reducing their withholdings because they are now itemizing and expecting to say on there taxes.   But then they will  owe the $500.00 in 2010 so they need to compensate for that.  

 

ClearPoint, Second point --- The would recieve the full $7,500 when they file their 2008 Tax Return.  (provided home costs 75,000 or more.   10% Rule).   By example if the person had a $100.00 refund coming and they qualified for the $7500.   they would get a check for $7,600.00. 

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Profile picture for Clearpoint

Ok, I can type slower for you if you would like. If you know you will be getting a tax rebate why not reduce your withholdings and get the money now instead of waiting until you file? Itemizing has little to do with the scenario. If they purchse close to the end of the current tax year, they might not have enough to itemize and will take the standard deduction, but they can start saving money now by chaning their withholdings.

Read number 21 on Rob's link.

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ClearPoint,   I did look at Rob's Link.   And still believe I am correct.   Let's see how the other Lending Professionals read this exchange.    Maybe my choice of words is different that yours or one of us has a incorrect understanding and not willing to look at the facts.   Review Rob's Link. 

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Profile picture for Clearpoint

Using your scenario, a person would normally get a $100 refund but now thanks to the credit they will receive $7600.  My answer to that is this, reduce your tax withholdings and start seeing some of that $7600 now instead of at tax time.  The closer you get to a zero refund means you got the money earlier

 

#21 from above link

Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2008 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

 

 

  • September 02 2008
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Profile picture for MagicalHouse

I think it overlooks the importance of current homeowners who may be thinking of moving up. It seems to me the homes in the first time buyer range are already moving, at least compared to the more expensive homes. Let's make it more appealing to move up.

Clearpoint and LenderBradfor, what is the deal? It's simple, if you like paying Uncle Sam money then wait until the end of the tax year and get a fat refund. If you actually hate paying Uncle Sam then adjust how much of your check goes to taxes and forego the hefty tax rebate for more money in your paycheck. It's not rocket science.

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ClearPoint,   Lets call it a draw here.    You are correct that if the adjust their withholdings NOW to reduce their Tax Liability when they file their 2008 Tax Return (in 2009) it would be smart.   However for 2009's tax return, they will have to do the opposite because in when they file that tax return in 2010 they will owe $500.00 more than they would have because of the Tax Credit/Loan.    Taking things to an extreme.   Because I knew I would be taking the $7,500 tax credit on my 2008 return, I would have almost nothing taken out of my paycheck today because I knew I was getting the $7,500.    I would never advise a client to do this extreme.   But that is what you are saying could be done.    Would you really advise that???    It makes sense, doesn't it???  But not advisable.    As far as me being correct, I was talking the long run, 15 years,   not 4 months of withholdings.  

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If your finances are so tight buying a home, you need to adjust your witholdings to take advante of the $7500 credit, you probably shouldn't be buying a home.

 

The darn thing has a present value of between 2 and 4k depending on what interest rate you get and your tax bracket. If I get a seller to give 2% to closing costs on a 400k home that is 4 times more valuable then your beloved tax credit... HEY must make it a great time to buy!

 

I don't have a problem with anybody mentioning it, but blowing it up as a 'reason to buy' when its actual value is less than 1% of a homes sales price is called lying.. MARKETS make reasons to buy, as in supply of homes versus demand, price versus rent, absorption rates, job creation etc.

 

The difference of point of view is simply one of understanding finance or not, or choosing to be disengenuine to make a sale. I don't have to tell anybody 'its a great time to buy', thats what the power of decades of honesty and trusting clients who know me well gives me, they will work with me even if I advise them of all the risks in the market honestly.

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