$8k Tax Credit: Inefficient, Expensive, Economically Stupid

The intensity of the push from a couple of major national lobbying groups (NAR and NAHB) to extend and/or expand the $8,000 first-time homebuyer tax credit seems to have increased since we last discussed the topic on these pages. With the supposed end of the program coming up in about seven weeks, now seems like a good time to broach the subject again.

Here’s the latest news on the status of a possible extension: Democrats May Extend Tax Credit for Homes

Democratic Congressional leaders are working with the White House to extend an expiring $8,000 tax credit for first-time home buyers, and aides said Wednesday that they were considering making it available to current homeowners who purchase a new residence.

The Democratic leaders met with the president to discuss a broad range of options to combat persistent high unemployment, officials say.

Keeping the home-buyers credit and broadening it has been a priority for real estate agents and the home builders lobbies, and for [Senator Harry] Reid, who faces a tough re-election race next year in a state [Nevada] that has been among the hardest hit by the housing crisis since mid-2007.

Okay first off, let’s drop the nonsense notion that somehow propping up home prices will “combat persistent high unemployment.” That’s a complete non sequitur. Now, before we really talk about extending the credit for another year, let’s have a look at its effectiveness and cost this year.

In February, when the “$787 billion” stimulus plan was passed into law, the CBO estimated that the $8,000 first-time homebuyer tax credit would cost around $6.6 billion (source, source). That would have been 825,000 first-time buyers claiming the $8,000 credit. As of September, the NAR is estimating that “1.8 to 2.0 million” first-time buyers will claim the credit, with a mere 350,000 of those being sales that “would not have taken place without the credit.” That would be a total cost of about $15.2 billion. Here’s a visual of those numbers:

Estimated Cost of the 2009 $8,000 Homebuyer Tax Credit

To me, that looks like a program that has been pretty poor at actually “stimulating” people to do something, and pretty good at giving a nice fat $8,000 handout to people who were planning to buy a house anyway, at a cost well over double the original estimate.

However, apparently to organizations like NAR and NAHB, that looks like a rousing success story that should be both extended and expanded. According to Calculated Risk the NAHB is pushing to up the credit to $15,000, expand it to all homebuyers, and extend it another year. Because, you know, We The People can afford it, right? It’s not like the federal government is facing a massive budget deficit and a mind-blowingly enormous debt.

If we’re going to use the kind of anti-logic that NAR and NAHB are apparently high on, I like the plan that (ironically) was suggested by a Georgia Realtor: Let’s increase the tax credit to $100,000! Heck, why not make it permanent, and up it to $500,000, or even a cool $1 million? Apparently cost and effectiveness are not factors in this decision, we should just do whatever it takes to get those pesky homebuyers “off the fence,” right?

The constant argument that is raised in favor of extending the tax credit is that because home sales are a major driving force in our economy, stimulating the real estate market is a critical ingredient to economic recovery. Is it just me, or does that way looking at the problem seem obviously inherently flawed?

Allow me to explain by way of analogy. Let’s say I decide to quit my job as an engineer and instead get into a full-time Ponzi scheme that has me selling “business secrets” to an ever-growing pyramid of underlings, who themselves re-sell the “business secrets” to their own underlings, passing on a commission to me. Eventually the scheme collapses (as all Ponzi schemes inevitably do), and my income drops to zero. Now, I could go back and get a new engineering job again, but instead I decide to focus all my effort on figuring out ways to get people buying “business secrets” again so I can get my income back to where it was at the peak.

Sounds insane, right? Yet that is exactly what the government is attempting to do with the various “stimulus” plans directed at the real estate market.

Meanwhile, as Calculated Risk points out, “stimulating” people to move out of rentals and buy their own homes has some rather unpleasant unintended consequences:

And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

What I don’t understand is why aren’t major REITs that own rental units across the country (e.g. Equity Residential) lobbying congress just as hard as NAR and NAHB against extending the tax credit? You would think they would have a pretty strong interest in not defaulting on their loans due to too-low occupancy rates.

So basically what we’re looking at in the $8,000 tax credit is an inefficient, massively expensive, and quite probably economically damaging program. I can’t imagine why Congress hasn’t expanded it already.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

61 comments:

  1. 1
    sf_boomerang says:

    “Okay first off, let’s drop the nonsense notion that somehow propping up home prices will “combat persistent high unemployment.” That’s a complete non sequitur.”

    Oh, Tim, don’t be silly. Of course it combats persistent high unemployment.

    Y’know… among Realtors.

  2. 2
    Ray Pepper says:

    Now come on Tim! This 8k bonus bucks is putting a lil heat on you to get out with the wife and scoop up a GEM as well doesn’t it? I know your looking…………Don’t be left out like all the people wishing they did the CFC auto deal……Now all these people are still driving their clunker waiting for the next program…

    Hurry Tim!!…………..8000 reasons to hurry!

  3. 3
    The Tim says:

    RE: Ray Pepper @ 2 – I would be seriously tempted to not claim the credit on my taxes even if I end up buying when some version of this garbage is in effect. It would be a pretty dumb move for my personal finances, but would definitely make a strong statement about my principles.

  4. 4
    AMS says:

    RE: The Tim @ 3 – When there is free money on the table, lap it up like any good dog would!

  5. 5
    Indy says:

    The best case to make against this plan is that a stimulus, classically understood, is primarily supposed to reduce unemployment – and that if you’re going to spend a certain amount of money the expenditures should be directed at those programs most efficient at turning dollars into jobs. New-hires tax credits, or subsidized economic-activity insurance are usually highly efficient in this regard.

    Anything that is less efficient than making a direct government hire at the average prior wage of the unemployed population (say, $40,000), should be clearly thrown out.

    So let’s look at the housing credit in this light. For every $40,000 spent (5 credits) perhaps 1 (being generous) additional purchase was stimulated. The removal of one additional housing unit from the existing vacant inventory – when that inventory is large – should have a small fractional impact on home-building activity. Let’s assume all the recent rise in the housing start rate from (357K to 479K, annualized) is due to the credit (being extremely generous!). That would mean each “extra’ house purchase stimulated about a third of an extra start.

    Unless that house requires 6,000 man-hours to build (I believe this is quite high) – we stimulated less than a year’s work for a single man, which we could have with direct hiring.

  6. 6
    Ray Pepper says:

    RE: AMS @ 4

    LOVE IT!! Too funny!

  7. 7
    Tyler says:

    The NAR and (your local neighborhood) Realtors may be the public face of the lobbying effort, but I would assume that the banking system is supporting this fully. Those who hold the underwater mortgage notes and SIVs are getting the best deal if they were to extend the credit.

  8. 8
    patient says:

    RE: Tyler @ 7 – I agree Tyler, this all started and will always come back to the banks. All these real estate stimuli has one goal, to funnel tax payer funds into the banks.

  9. 9
    Kary L. Krismer says:

    By sf_boomerang @ 1:

    “Okay first off, let’s drop the nonsense notion that somehow propping up home prices will “combat persistent high unemployment.” That’s a complete non sequitur.”

    Oh, Tim, don’t be silly. Of course it combats persistent high unemployment.

    Y’know… among Realtors.

    I’m not sure why Tim doesn’t see it. Part of that might be that it’s not the propping up of prices that helps unemployment, it’s the volume. Housing sales create a lot of other transactions, and if people get $8,000 after closing, more such transactions will be created than would be otherwise. HD, furniture companies, etc., would be the major beneficiaries. That does create jobs.

  10. 10
    Kary L. Krismer says:

    By patient @ 8:

    RE: Tyler @ 7 – I agree Tyler, this all started and will always come back to the banks. All these real estate stimuli has one goal, to funnel tax payer funds into the banks.

    Well some of it is related to getting the toxic assets out of the banks (and other financial entities), through sales and refinances. The interest rate policies have been particularly effective at doing that (although at what cost).

  11. 11
    patient says:

    RE: Kary L. Krismer @ 9 – It could also have the opposite impact. That real estate connected companies holds off any hiring while the tax credit is in place of fear of being saddled with a bloated work force when the credit expires. Government intervention creates uncertainty of the sustainable health and companies do not like uncertainty, it does not encourage hiring.

  12. 12
    The Tim says:

    RE: patient @ 11 – Then we’re in agreement! Let’s turn it into a permanent credit for $1 million. That would definitely remove the uncertainty ;^)

  13. 13
    Scotsman says:

    Theater of the absurd. The entire system is broken. All of the adults have left the room, leaving the bankers in charge.

  14. 14
    patient says:

    RE: The Tim @ 12 – Absolutely!

    A little less avantagarde approach would be to implement lower federal income taxes for at least 5 years. It’s a fair way to increase sustainable, healthy spending. Giving people incentives, like if you hire this person or buy this product you will get some money is not sustainable or healthy. Lower income tax for 1-year would make me put the bulk of the money into the bank. A 5-year period would make me increase my spending, no doubt.

  15. 15
    Tyler says:

    RE: Kary L. Krismer @ 9

    Kary, I think you miss Tim’s point that this transactional volume doesn’t result in “productive work” being done, in the sense that it helps the portion of our GDP that we could possibly help our trade, or budget deficits. I know that everyone is doing work, but what the country actually needs is work that creates “widgets” that people *outside* our country value.

  16. 16
    Costco Mike says:

    By Kary L. Krismer @ 9:

    By sf_boomerang @ 1:

    “Okay first off, let’s drop the nonsense notion that somehow propping up home prices will “combat persistent high unemployment.” That’s a complete non sequitur.”

    Oh, Tim, don’t be silly. Of course it combats persistent high unemployment.

    Y’know… among Realtors.

    I’m not sure why Tim doesn’t see it. Part of that might be that it’s not the propping up of prices that helps unemployment, it’s the volume. Housing sales create a lot of other transactions, and if people get $8,000 after closing, more such transactions will be created than would be otherwise. HD, furniture companies, etc., would be the major beneficiaries. That does create jobs.

    But doesn’t that create jobs in other countries as opposed to here since 80% of what you suggested comes from China or other parts of Asia? So it adds to a deficit in our country so we can sell our debt to China until eventually they own more than 50% of our country? At most I think it might slow unemployment from gaining by keeping people in the shipping, retail industries in thier jobs longer but I don’t think it will create jobs as they described when it was passed. I may not understand what you meant? That to me is using the government like a credit card to buy stuff you don’t need and just want. Let me know if I read your comment wrong.

  17. 17

    I think the intended outcome of the tax credit is to simply sell houses. How does this do society any good?
    Believe me, I’m as pinko liberal as they come, but this just isn’t something that serves anybody, especially over the long run….One thing some local governments have done is sell dilapidated and condemned homes for 100 dollars, if you agree to improve the home and occupy it for at least three years.The City of Boston even offered low interest improvement loans/ small grants. My mother in law did that in Boston 30+ years ago, and so did a bunch of others, so much so that the Jamaica Plain neighborhood in Boston has transformed into a mostly well taken care of neighborhood with lower crime. As houses got fixed up, empty stores got filled to serve the new residents, who were now paying property taxes..It wasn’t really costing the city of Boston a whole lot to do this, and the only losers were the gangsters and heroin addicts who used to hang out in the abandoned buildings.
    But the 8000 dollar credit? I don’t know. Homeownership is a good thing and should be encouraged, but face it:
    Rescuing the real estate industry is not quite the same as rescuing a necessary industry, and the 8000 dollar tax credit doesn’t really encourage being responsible…It’s not saying ” Buy a home now because you can afford it and the mortgage is as low as rents.” It’s saying ” This is a one time bribe, folks. Step right up, sucker. Everyone’s a winner.”

  18. 18
    thatbadfeeling says:

    Long time reader, first time poster here…
    My wife and I have been ‘in the market’ for about nine months now, keeping an eye out for a small starter home in the North Seattle/Shoreline area. Although we’ve been pre-approved for 450K, our line in the sand is at 300K, for various reasons. Needless to say, there hasn’t been a whole lot out there to get excited about! So we’ve been saving our cash, biding our time and patiently waiting for this credit to expire so prices might drop a little more.
    I now I read the credit may be extended and even increased to 15K! Am I a fool for not jumping all over this rebate? While we would hate to miss out on free* money from our fellow taxpayers, I can’t help but feel we’d be getting a much bigger discount than 8 or even 15K if this credit didn’t exist.
    I feel right now I am one of those “pent-up” buyers sitting on the fence. Someone tell me our patience will pay off! For us, it’s not really about timing the market or holding out for the best possible deal. My wife and I believe that if we can just wait a little longer, there will be a much better selection in our price range down the road. Although we are ready for our first home now, we’d hate to see that our money could have gone so much further had we waited another year or two.
    Blast it! I am running out of patience. Thanks for providing me a place to vent; this is a great site.
    *not guilt free

  19. 19
    AMS says:

    RE: thatbadfeeling @ 18 – “*not guilt free”

    I have made it clear that I traded in my ‘clunker’ under the CFC program. Do I feel guilty? No! I’d feel worse if I still had my old clunker. Yet I still have and drive my other clunker…

  20. 20
    Back to basic says:

    The home exercise sales tax could easily cover the 8K credit. So it is a fair deal to buyers and tax payers. By spending 8k tax money, the home owner will have to buy things to stuff their house and pay local government property tax. What a deal? Even though I am not qualify for the 8k, I am still for it. I guess the landlord and sidelines are not happy with this. By stimulus measure to keep the economy afloat, that will make everyone keep their job and thus happier. Even though 8k is a drop in a bucket in Seattle, but it will help a lot of 1st time buyer into the house and current home owner to move up. I said here this winter is the time to do some serious house hunting. I hope I can get a good deal (even many of the listing price are still unrealistic). So if the house is listed proper, it will be sold. Low interest, people are panic (less bidder I like it) and large inventory. I can only see home price move side ways until the inventory drys out. People need a place to stay:own or rent. Renting helps me save 20% down pay these years and now it’s the time to do house shopping and hoping to get a good deal.

  21. 21
    patient says:

    RE: thatbadfeeling @ 18 – I think your patience will pay off but do yourself a huge favour and try to get out of the mindset where someone needs to tell you that what you are doing is the right thing. Collect information from different sources on the fundamentals that drives home prices, the historical level of home prices etc ( this site is one great source ) and use your own logic to make decisions, adjust it if new information tilts the balance and so on. Live with the decisions and the consequences and don’t rely on anyone to tell you what to do or blame if you make the wrong decision. You will probably be surprised on how relatively slow, easy and predictable the fundamentals are in the long run.

  22. 22

    There’s a Silver Lining Tim

    You have to pay $8000 in income taxes to get $8000 in credit…..I imagine a lion’s share of the marginally qualified FHA candidates with low FICO scores didn’t pay near that much in income tax…LOL

  23. 23
    Kary L. Krismer says:

    By softwarengineer @ 22:

    There’s a Silver Lining Tim

    You have to pay $8000 in income taxes to get $8000 in credit…..I imagine a lion’s share of the marginally qualified FHA candidates with low FICO scores didn’t pay near that much in income tax…LOL

    I’m not certain, but I don’t think that’s correct. This is a credit where you don’t have to have had the tax liability. Rather unusual, to say the least.

    Not precisely clear, but this link indicates decreases tax bill or refund.

    http://www.irs.gov/newsroom/article/0,,id=204671,00.html

  24. 24
    Scott Weitz says:

    RE: thatbadfeeling @ 18

    I feel your pain. Wife and I have been renting since ’05.

    Having been fairly obssesed with this real estate crisis the past few years, I can say with confidence that prices are not done falling in Seattle.

    If you are going to buy, make sure you buy a Bank Owned Property. They are cheaper, and banks are more willing to negotiate dramatically.

  25. 25

    RE: AMS @ 19

    I Was Talking to an Attorney About the CFC this Week

    She wasn’t interested in it like myself, her Miata and my Classic both went for about $20-22K base new and we both had way under 100K on the odometer(s) and both our cars run like tops…..why in Hades would either of us want to drive a new $20-22K car off the lot to save $4500 [subtract less the actual value of the trade in]; to lose about $4500 just driving it off the lot [unless you get that 60 day GM return guarentee]….LOL

    Makes absolutely no sense to both of us.

  26. 26
    Kary L. Krismer says:

    I’m very surprised we haven’t seen news stories yet about CFC dealers not getting paid.

  27. 27
    The Tim says:

    RE: softwarengineer @ 22Kary @ 23 is correct. Direct from the IRS:

    Q. I don’t owe taxes and/or my income is exempt from tax and I do not have a filing requirement. Do I qualify for the credit?

    A. The credit is fully refundable and, if you qualify as a first-time homebuyer, having tax-exempt income will not preclude eligibility. Although there are maximum income limits for qualifying first-time homebuyers, there are no minimum income criteria. Thus, someone with no taxable income who qualifies as a first-time homebuyer may file for the sole purpose of claiming the credit for a refund.

    Q. When is a “refund” not really a refund?
    A. When the government is hellbent on handing out free money in a desperate attempt to reinvigorate a massive nationwide Ponzi scheme.

  28. 28
    Kary L. Krismer says:

    RE: softwarengineer @ 25 – I didn’t think it made sense even on my 89 Ranger, worth about $1,000, that was about due for a new clutch at the time.

    I wonder how many cars had $400-500 of repairs done just so they would run and qualify for CFC?

  29. 29
    AMS says:

    RE: softwarengineer @ 25 – I have made it known that I drove a well equipped 2009 Pontiac Vibe off the lot for under $9,600, all fees, taxes, and so on included. That’s $19,500 less the $4,000 factory rebate, $4,500 Obama CFC money, and other incentives. I have also pointed out that the Pontiac Vibe is made on the same assembly line as the Toyota Matrix, using the same workers and same parts, excluding the wrapper.

    I would have purchased two if CFC would have allowed it.

  30. 30
    AMS says:

    RE: Kary L. Krismer @ 28 – “I wonder how many cars had $400-500 of repairs done just so they would run and qualify for CFC? ”

    All the car had to do was move under its own power. There was no lengthy test, and it could die the moment after being traded.

    How many had repairs made? More like how many dealers accepted cars that didn’t actually qualify knowing that once crushed it didn’t make much difference?

    Mine did drive. I’ll upload some photos of what I traded in, and you will get an idea of just how good of a deal I got!

  31. 31

    RE: Kary L. Krismer @ 23

    I Do My Own Income Taxes Kary

    IRS definition of a tax credit, states in part:

    “…A tax credit is a direct reduction in the tax liability of the taxpayer receiving the
    credit….”….”Most individual tax credits are nonrefundable (Pub. 17, page 243): if the
    amount of the credit exceeds the tax liability, the taxpayer is not entitled to a refund of
    the excess….”

    The rest of the URL:

    http://www.acatcredentials.org/pdf/07IncomeTaxCredits.pdf

    It is a silver lining per Pub 17.

  32. 32
    AMS says:

    RE: The Tim @ 27 – “Q. When is a “refund” not really a refund?”

    Remember that first housing “credit” that was a “refund” but needed to be paid back, interest free, over 15 years beginning in 2010.

    That’s not really much of a credit or a refund, and some buyers are starting to figure that out!

  33. 33
    AMS says:

    RE: softwarengineer @ 31 – See post #32!

    Also don’t believe those publications. A good tax person knows the law, rather than the IRS’s interpretation given through a very limited publication. The IRS reduces many pages of code down to a few paragraphs…

    Also a good tax planner can structure transactions to maximize tax avoidance, otherwise known as legally minimizing taxes, yet keeping the substance of the deal the same.

    That so-called “tax credit” is really just a shift in tax liability timing, rather than a true credit, but I suppose we are getting to semantics here.

  34. 34
    Kary L. Krismer says:

    RE: softwarengineer @ 31 – I’m aware how credits usually work. That’s why I said this one was unusual.

  35. 35
    AMS says:

    RE: Kary L. Krismer @ 34 – The Earned Income Tax Credit is another example of a fully refundable credit even if no taxes are due, and plenty of people qualify for it and pay negative income tax.

  36. 36

    RE: AMS @ 32

    I Catch Your Drift

    We all may be in for a “Big Obama Income Tax Increase Surprise” when the 2009 Income Tax Pubs come out….stay tuned…LOL

    I gave you historical definitions of a tax credit, and remember when our state was going to “upfront” the $8000, but the feds wouldn’t allow it, said it was illegal, because the state couldn’t prove the home buyer would actually qualify for the $8K…..

  37. 37
    AMS says:

    RE: softwarengineer @ 36 – I think the feds would allow the state to front the cash, but what the feds said was that they would not pay the state directly, for a variety of reasons. In other words, the state would have to collect all those $8k advances, rather than just tap the IRS for the money back.

    I think the state wanted to tap the IRS for the credit as if it was a family related obligation, such as child support. The state can show a court order for the family support, but it much harder to show that the person did indeed qualify, and that the state should get the cash…

  38. 38
    Jimmy says:

    RE: softwarengineer @ 31
    “I Do My Own Income Taxes Kary”

    You should reconsider that position. There’s two types of tax credits: refundable and non-refundable. Google can explain the difference to you.

  39. 39
    Kary L. Krismer says:

    RE: AMS @ 37 – Yes, it was the direct pay that held up the state’s program, and IMHO, thankfully.

  40. 40
    AMS says:

    RE: Kary L. Krismer @ 39 – I still don’t know what the state would have done had the taxpayer actually owed the IRS, even with the $8k credit.

    Possible? yes. Probable? no.

  41. 41
    Rojo says:

    same old 10 people have 95% of the postings!

    Request to readers – jump in, join the discussion, make it more interesting. The entertainment value of this site is starting to fade again.

  42. 42
    Roger says:

    We’re back in the housing market, and would like to buy sooner rather than later. Not really worried about hitting the absolute bottom, we’re in it for the long haul and the intangibles of ownership are important to us. Plus we have some hobbies/animals that are difficult to find landlords for.

    While the credit isn’t going to get us to buy a mediocre place just to have the cash, I’m more than happy to take the handout if it’s there. Likewise, if it goes away, nothing changes for us. If another, larger, credit shows up, hooray! But it won’t be increasing our price range. I typically cut the IRS a check for about 10 – 15K in April, so it would be nice to wash that out, but that’s the extent of my plans to spend it if it happens.

    We’ve made some lowball offers but haven’t got a bite yet. Out here in Island county a lot of the overpriced stuff seems to be owned by people more than willing to have their homes on and off the market for years at a time.

  43. 43
    David Losh says:

    RE: Roger @ 42

    Island county will continue to tank, hard. The prices stayed way over the top even after the bubble burst. Two things are going to happen, one is that high end prices can and will deteriorate in the next two years, second is that the second retirement home will be in places more reasonably priced.

    Another thing that is becoming a trend is to dump speculative properties and all of Island County qualifies for that.

    Those homes coming off and on will be on again at drastic price reductions.

    Most people are looking at the 15th of October, but it looks like November before prices begin to decline. The big economic numbers will be coming out after the Christmas shopping season. If consumer confidence is way down you may get a bigger bang in January and February of next year.

  44. 44
    Anon. says:

    The thing is,
    The 16 thousand dollar tax credit is going to get some people off of the fence, and yes, borrow demand from the future, but nothing is free, and Obama our dictator is going to have each and everyone of us pay for it in the future. He is essentially going to steal from people to make it happen (through taxes.) So get the tax credit, and you’ll come out even, zero net ballance. Don’t get the tax credit and end up paying for other peoples’.

  45. 45
    AMS says:

    RE: Anon. @ 44 – Thanks for paying for my CFC car.

    The tax code isn’t quite that linear.

  46. 46
    PNW11 says:

    RE: Rojo @ 41
    Alright, I’ll jump in. I’ve read the Seattle Bubble for several years now (along with the Irvine Housing Bubble, which is great, but seems to have gone a bit ‘Hollywood’ recently). I live in Irvine (Southern Califrornia), am a CPA doing tax compliance and consulting for real estate private eqiuty funds, and am currently working on my Masters in Business Taxation at the University of Southern Califonia. My wife and I are looking to relocate to the Seattle area once we are done with our schooling. As such, I have made the Seattle Bubble a part of my daily reading so as to gain a longer term understanding of the local real estate. With that out of the way, browsing through today’s comments (and various others in the past), I could not help but notice some confusion about the ‘First-Time homebuyer credit,’ and credits in general. I would not rely on Publications, especially those revised as of 2007 to help determine the refundability of a credit most recently amended in 2009. Here is the actual code; enjoy!

    Code, Regulations, Committee Reports & Tax Treaties
    Internal Revenue Code
    Current Code
    Subtitle A Income Taxes §§1-1563
    Chapter 1 NORMAL TAXES AND SURTAXES §§1-1400U-3
    Subchapter A Determination of Tax Liability §§1-59B
    Part IV CREDITS AGAINST TAX §§21-54AA
    Subpart C Refundable Credits §§31-37
    §36 First-time homebuyer credit.

    Internal Revenue Code
    § 36 First-time homebuyer credit.

    (a) Allowance of credit.
    In the case of an individual who is a first-time homebuyer of a principal residence in the United States during a taxable year, there shall be allowed as a credit against the tax imposed by this subtitle for such taxable year an amount equal to 10 percent of the purchase price of the residence.
    (b) Limitations.
    (1) Dollar limitation.
    (A) In general. Except as otherwise provided in this paragraph , the credit allowed under subsection (a) shall not exceed $8,000.
    (B) Married individuals filing separately. In the case of a married individual filing a separate return, subparagraph (A) shall be applied by substituting “$4,000” for “$8,000”.
    (C) Other individuals. If two or more individuals who are not married purchase a principal residence, the amount of the credit allowed under subsection (a) shall be allocated among such individuals in such manner as the Secretary may prescribe, except that the total amount of the credits allowed to all such individuals shall not exceed $8,000.
    (2) Limitation based on modified adjusted gross income.
    (A) In general. The amount allowable as a credit under subsection (a) (determined without regard to this paragraph) for the taxable year shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which is so allowable as—
    (i) the excess (if any) of—
    (I) the taxpayer’s modified adjusted gross income for such taxable year, over
    (II) $75,000 ($150,000 in the case of a joint return), bears to
    (ii) $20,000.
    (B) Modified adjusted gross income. For purposes of subparagraph (A) , the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911 , 931 , or 933 .
    (c) Definitions.
    For purposes of this section —
    (1) First-time homebuyer.
    The term “first-time homebuyer” means any individual if such individual (and if married, such individual’s spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.
    (2) Principal residence.
    The term “principal residence” has the same meaning as when used in section 121 .
    (3) Purchase.
    (A) In general. The term “purchase” means any acquisition, but only if—
    (i) the property is not acquired from a person related to the person acquiring such property, and
    (ii) the basis of the property in the hands of the person acquiring such property is not determined—
    (I) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or
    (II) under section 1014(a) (relating to property acquired from a decedent).
    (B) Construction. A residence which is constructed by the taxpayer shall be treated as purchased by the taxpayer on the date the taxpayer first occupies such residence.
    (4) Purchase price.
    The term “purchase price” means the adjusted basis of the principal residence on the date such residence is purchased.
    (5) Related persons.
    A person shall be treated as related to another person if the relationship between such persons would result in the disallowance of losses under section 267 or 707(b) (but, in applying section 267(b) and (c) for purposes of this section , paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants).
    (d) Exceptions.
    No credit under subsection (a) shall be allowed to any taxpayer for any taxable year with respect to the purchase of a residence if—
    (1) Repealed.
    (2) Repealed.
    (1) the taxpayer is a nonresident alien, or
    (2) the taxpayer disposes of such residence (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer’s spouse)) before the close of such taxable year.
    (e) Reporting.
    If the Secretary requires information reporting under section 6045 by a person described in subsection (e)(2) thereof to verify the eligibility of taxpayers for the credit allowable by this section, the exception provided by section 6045(e) shall not apply.
    (f) Recapture of credit.
    (1) In general.
    Except as otherwise provided in this subsection , if a credit under subsection (a) is allowed to a taxpayer, the tax imposed by this chapter shall be increased by 62/3 percent of the amount of such credit for each taxable year in the recapture period.
    (2) Acceleration of recapture.
    If a taxpayer disposes of the principal residence with respect to which a credit was allowed under subsection (a) (or such residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer’s spouse)) before the end of the recapture period—
    (A) the tax imposed by this chapter for the taxable year of such disposition or cessation shall be increased by the excess of the amount of the credit allowed over the amounts of tax imposed by paragraph (1) for preceding taxable years, and
    (B) paragraph (1) shall not apply with respect to such credit for such taxable year or any subsequent taxable year.
    (3) Limitation based on gain.
    In the case of the sale of the principal residence to a person who is not related to the taxpayer, the increase in tax determined under paragraph (2) shall not exceed the amount of gain (if any) on such sale. Solely for purposes of the preceding sentence, the adjusted basis of such residence shall be reduced by the amount of the credit allowed under subsection (a) to the extent not previously recaptured under paragraph (1) .
    (4) Exceptions.
    (A) Death of taxpayer. Paragraphs (1) and (2) shall not apply to any taxable year ending after the date of the taxpayer’s death.
    (B) Involuntary conversion. Paragraph (2) shall not apply in the case of a residence which is compulsorily or involuntarily converted (within the meaning of section 1033(a) ) if the taxpayer acquires a new principal residence during the 2-year period beginning on the date of the disposition or cessation referred to in paragraph (2) . Paragraph (2) shall apply to such new principal residence during the recapture period in the same manner as if such new principal residence were the converted residence.
    (C) Transfers between spouses or incident to divorce. In the case of a transfer of a residence to which section 1041(a) applies—
    (i) paragraph (2) shall not apply to such transfer, and
    (ii) in the case of taxable years ending after such transfer, paragraphs (1) and (2) shall apply to the transferee in the same manner as if such transferee were the transferor (and shall not apply to the transferor).
    (D) Waiver of recapture for purchases in 2009. In the case of any credit allowed with respect to the purchase of a principal residence after December 31, 2008, and before December 1, 2009—
    (i) paragraph (1) shall not apply, and
    (ii) paragraph (2) shall apply only if the disposition or cessation described in paragraph (2) with respect to such residence occurs during the 36-month period beginning on the date of the purchase of such residence by the taxpayer.
    (5) Joint returns.
    In the case of a credit allowed under subsection (a) with respect to a joint return, half of such credit shall be treated as having been allowed to each individual filing such return for purposes of this subsection .
    (6) Return requirement.
    If the tax imposed by this chapter for the taxable year is increased under this subsection , the taxpayer shall, notwithstanding section 6012 , be required to file a return with respect to the taxes imposed under this subtitle.
    (7) Recapture period.
    For purposes of this subsection, the term “recapture period” means the 15 taxable years beginning with the second taxable year following the taxable year in which the purchase of the principal residence for which a credit is allowed under subsection (a) was made.
    (g) Election to treat purchase in prior year.
    In the case of a purchase of a principal residence after December 31, 2008, and before December 1, 2009, a taxpayer may elect to treat such purchase as made on December 31, 2008, for purposes of this section (other than subsections (c) and (f)(4)(D) ).
    (h) Application of section.
    This section shall only apply to a principal residence purchased by the taxpayer on or after April 9, 2008, and before December 1, 2009.

  47. 47
    Kary L. Krismer says:

    I love the IRS tax code. I remember spending an entire day in law school where the professor went over the language of the code that pertains to the netting of capital gains and losses (short term and long term). I think it’s probably still the same as back in 83, but the process is actually quite simple, but the language is impossible to understand. I already knew how it worked prior to the class, but I don’t think anyone learned anything that day. The next day the professor explained how it actually worked. You have to love the efficiency of law school professors.

  48. 48
    AMS says:

    RE: Kary L. Krismer @ 47 – In 1983 the tax code was the old system, but the capital gains and losses probably is essentially the same. That said, I would trust no information that’s based on the old tax code.

  49. 49
    mukoh says:

    A friend of mine buying the home and getting the credit in two weeks, plans to put the $8k right away towards principal. Does that make it bad? Hell no. Reduces his loan by minute amount still however it is equity.

  50. 50
    mukoh says:

    RE: patient @ 14 – Patient the government could also boost employement by at least reducing if not eliminating 10% payroll tax that employers have to put in for every employee. That would boost employement by at least 5% when there is no payment for me for example to have employees.

  51. 51
    Kary L. Krismer says:

    RE: mukoh @ 49 – It should really shorten the amortization considerably. He should make sure he doesn’t trip any pre-payment limits that might result in a penalty.

  52. 52
    patient says:

    RE: mukoh @ 50 – mukoh, I think at this point it’s more effiicient to spur demand that make your business able to carry more employees by growing your revenue. A tax relief for companies can easily be pocketed as extra profit or cash reserves, especially if demand is not growing. You could argue that by hiring more people you increase demand but I think that would be to put the carriage in front of the chorse so to speak. Not many companies would hire first in order to spur demand. It’s more effiicient to increase the disposable income of the consumers, it will more likely spur demand for your business which leads to the need for additonal employees. I think it would be good to keep it focused and simple. All the stimuli fairly dsitributed in one effort to make the effort really big.

  53. 53
    AMS says:

    By mukoh @ 49:

    A friend of mine buying the home and getting the credit in two weeks, plans to put the $8k right away towards principal. Does that make it bad? Hell no. Reduces his loan by minute amount still however it is equity.

    Depends on his interest rate and whether or not he thinks it’s too high.

    Cheap debt should be paid later rather than sooner.

    Expensive debt should be paid sooner rather than later.

  54. 54

    so how will you vote next election?

  55. 55

    By Rhonda Porter @ 54:

    so how will you vote next election?

    I can only vote for Nobel laureates.But OMG!! What if Al Gore challenges Obama?

  56. 56
    Scotsman says:

    RE: Rhonda Porter @ 54

    I’ll give you one guess! ;-)

  57. 57

    […] his predecessor David Lereah, I present some excerpts from a post he made on Friday regarding the inefficient, expensive, and economically stupid homebuyer tax credit: Unleashing Pent-Up Housing Demand and Sustainable Economic Recovery There is […]

  58. 58

    […] a pair of somewhat conflicting stories about the push to extend and expand the inefficient, expensive, economically stupid $8,000 first-time homebuyer tax […]

  59. 59

    […] hell, if “it can’t hurt anything,” I still say we should bump it up to $1 million, and make it permanent. Start lobbying your senators and representatives […]

  60. 60

    […] prices began falling a good year before Seattle, and had fallen further than Seattle before the inefficient, expensive, and economically stupid tax credit put the brakes on the full return to affordable […]

  61. 61

    […] There are just too many unknown factors. Maybe the government will kick off a whole new permanent homebuyer tax credit program, giving anyone who buys a house $100,000. Or maybe our economy will spend the next two decades in a […]

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