Stimulus Bill Offers Tax Credits for Homebuyers

The House and Senate grappled over tax credits and tax rebates, but finally, the new economic stimulus plan will incorporate some form of tax relief for homebuyers.

Inevitably, taxes become the government's hefty bargaining chip in any major legislation. So it's no surprise that lawmakers are pushing to establish mega tax credits to fuel demand for home purchases.

Tale of two houses     

The House and Senate legislators were able to agree on one thing: both wanted to offer tax credits to homebuyers. But the legislators had a tough time agreeing on how much the credit should be, who should get it, and how long it will be available.

The debate originally surfaced when lawmakers passed two different versions of the Obama economic stimulus plan, a House version and the Senate counterpart. The two plans were not polar opposites exactly, but they had striking differences-including the way each one would treat the homebuyer tax credit.

Here are the highlights of the House tax credit plan:

• $7,500 tax credit available to first-time homebuyers only
• Amends an existing tax credit program that requires repayment over 15 years by eliminating the repayment requirement
• Refundable, meaning that qualified taxpayers will get a tax rebate check if they owe less than $7,500 in taxes.
• Eligibility begins phasing out when homebuyer's income exceeds $75,000 for individuals and $150,000 for married couples

Here's what the Senate's tax credit plan looked like:

• $15,000 tax credit available to all homebuyers (excluding second-home purchases)
• Nonrefundable, meaning that qualified taxpayers will not receive a tax rebate check if the credit exceeds their tax liability for the year
• Taxpayers can split the credit between two tax years, 2009 and 2010
• Can be applied to 2008 taxes even if the home is purchased in 2009
• No income restrictions
• Must be repaid if the home is sold in less than two years

What ultimately passed is a combination of the two.  The bill allows first-time homebuyers to take a maximum credit of $8,000, with no requirement that it be paid within 15 years.  However, this only applies to properties that are purchased in 2009.  Additionally, if a homebuyer sells the property within three years of purchase, he'll have to repay the total amount.

Mortgages and tax credits

Mortgage and housing experts believe that tax credits can effectively stimulate housing demand and support a housing market recovery. A spokesperson for the National Association of Realtors recently commented that a $7,500 tax credit could potentially drive home sales to increase 10 percent-by attracting buyers who are tentative about the costs associated with buying a home.

Critics claim that buyers are staying out of the housing market because they're worried about continued price declines-not because they can't afford the purchase. These skeptics question whether a sizeable tax credit can effectively alleviate those concerns. Another worry is that the tight lending environment will work against the initiative because, tax credit or not, homebuyers still have to obtain mortgage financing.