$15,000 Credit For Homebuyers

In the newly proposed Stimulus bill they have added this incentive for homebuyers,

Sen. Johnny Isakson, R-Ga., who advanced the homebuyers tax break, said it was intended to help revive the housing industry, which has virtually collapsed in the wake of a credit crisis that began last fall.

The proposal would allow a tax credit of 10 percent of the value of new or existing residences, up to a $15,000 limit. Current law provides for a $7,500 tax break but only for first-time homebuyers.

This is supposed to replace the $7500 tax credit for first-time homebuyers.  Few understand that the current tax credit may have to be paid back –

1.  
   1. Does the credit have to be paid back to the government? If so, what are the payback provisions?
      Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
   2. Why must the money be repaid?
      Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices.

The biggest question, if this makes it through Congress in it’s current form, will it actually increase sales?  I don’t think it will.  There will be a small bump possibly but it will just be a bonus to the rest of the buyers.  It is a one time benefit that you don’t realize until tax time.  Buyer’s are thinking about their cost now and the cost in the future. 

Much like walking into a store to find the item you are buying anyway just happens to be on sale, buyers out there will get a extra benefit that isn’t worth the cost to the government.   The major benefit is that those buyers will get a bonus around tax time that they can put into the economy but I don’t think it will have a significant effect on sales.