The Housing and Economic Recovery Act of 2008 provides a new refundable tax credit for individuals who are qualified first-time homebuyers of a principal residence in the United States. For 2008, the credit applies to a principal residence purchased by the taxpayer after April 8, 2008, and on or before December 31, 2008. Homebuyers who qualify are allowed a one-time credit against their income tax for the year of purchase. Unlike some past credits, this one must be repaid over a 15-year period. As a result, the new tax credit works like an interest free loan. You take the full credit on your 2008 return, and then repay the credit amount in equal payments over 15 years, with no interest charges.

Note: The American Recovery and Reinvestment Act of 2009 made changes to the credit for purchases made after December 31, 2008, and before December 1, 2009. For information affecting the credit for 2009, see Topic 612.

A "first-time homebuyer" is any individual (and spouse if married) who had no present ownership interest in a qualifying principal residence during the 3-year period ending on the date of purchase of the principal residence for which a first-time homebuyer credit is being claimed.

Note: The following taxpayers do not qualify for the first-time homebuyer credit:

• A homebuyer (or the homebuyer's spouse) who qualifies for the District of Columbia first-time homebuyer credit in the year of purchase or in any prior year
• A homebuyer whose home was financed by the proceeds of tax-exempt mortgage revenue bonds
• A homebuyer who is a nonresident alien
• A homebuyer who disposes of the residence (or it ceases to be the taxpayer's (and spouse's) principal residence) before the close of a taxable year for which a credit otherwise would be allowable
• A homebuyer who acquires their home by gift or inheritance
• A homebuyer who acquires their home from a related person (this includes spouses, ancestors, and descendants, but excludes siblings)

The term "purchase price" means the adjusted basis of the principal residence on the date such residence is purchased.

The initial credit for qualified buyers is equal to 10% of the purchase price of the principal residence. For 2008 the credit amount cannot exceed $7,500 ($3,750 for married individuals filing a separate return).

The credit phases out for individuals with modified adjusted gross income (MAGI) between $75,000 and $95,000 ($150,000–$170,000 for joint filers) for the year of purchase. The credit is completely phased out for an individual with a MAGI equal to or more than $95,000 ($170,000 for joint filers).

To determine the allowable credit, subtract the limit threshold of $75,000 ($150,000 in the case of a joint return) from your MAGI. Divide the difference by $20,000 to get your reduction ratio. Multiply your initial credit by your reduction ratio to arrive at the credit reduction amount. Subtract the credit reduction amount from the initial credit to arrive at the allowable credit amount.

Example: Facts — Filing Status = Single, MAGI = $80,000, Purchase Price = $80,000, Initial Credit = $7,500 (limited to the lower of $8,000 (10% of Purchase Price) or $7,500).

$80,000 MAGI ........... – ..... $75,000 Limit Threshold .... = .... $5,000 Excess Over Threshold

$..5,000 Excess ........... ÷ ...... $20,000 Max. Excess ....... = .... 25% Reduction Ratio

$..7,500 Initial Credit .. x ..... 25% Reduction Ratio ........ = .... $1,875 Credit Reduction

$..7,500 Initial Credit .. – ..... $1,875 Credit Reduction ... = .... $5,625 Allowable Credit

If a first-time homebuyer credit is allowed to a taxpayer, the taxpayer's income tax is increased by 6 2/3% of the amount of such credit for each taxable year in the 15-year "recapture period." The recapture period begins with the second taxable year following the year of purchase for which the credit is taken.

For example, if a taxpayer is allowed a $7,500 first-time homebuyer credit in 2008, the taxpayer must recapture the credit amount by adding $500 (which is 6 2/3% of $7,500) to his income tax liability each year for 15 years, beginning in 2010.

• Acceleration of recapture – If a taxpayer disposes of the principal residence for which a first-time homebuyers credit was allowed (or ceases using it as taxpayer's and spouse's principal residence) before the end of the 15-year recapture period, the remaining credit repayment amount is added to the income tax liability of the taxpayer for the year of sale or cessation of use.
• Exceptions to recapture – In the case of a sale of the principal residence to an unrelated person, the increase in tax due to accelerated recapture is limited to the amount of gain (if any) on such sale. For purposes of calculating gain, the adjusted basis of such residence shall be reduced by the amount of the first-time homebuyer credit allowed, to the extent not previously recaptured. In the case of an involuntary conversion, recapture is not accelerated if a new principal residence is acquired within a 2-year period. No amount is recaptured after the death of the taxpayer.

The credit is claimed on Form 5405, First-Time Homebuyer Credit, and attached to your 2008 Form 1040.

For more detailed information on qualifying for and claiming the first-time homebuyer credit for 2008, refer to the Form 5405 Instructions, the First-Time Homebuyer Credit Information Center article, and additional topics on this subject, on the IRS Website at www.irs.gov.

For information regarding the rules on claiming the First-Time Homebuyer Credit for qualifying purchases made in 2009, see Topic 612, First-Time Homebuyer Credit–Purchases made in 2009, and the 2009 IRS News Release (IR-2009-14, Feb. 25, 2009), on the IRS Website at www.irs.gov.