Home buying tax advantages

The house introduces HR 5720

House bill 5720, or the "housing assistance tax act" in it's simplest form is a tax credit for first time home buyers. This tax credit will allow you to take a $7,500 tax credit in the year of the purchase. This is not a tax deduction but a tax credit. This means you will actually get $7,500 back on your taxes or a credit toward what you owe.

The Qualifications

To qualify for HR 5720 you must meet the following criteria;

• Purchase any single family residence including condos that will be used as your personal residence
• If you are single your adjusted gross income must be $70,000 or less and if you are married filing jointly your income must be $140,000 or less.
• Must have NOT owned a residence in the last 3 years
• Purchase must be made between April 8, 2008 and April 1, 2009

The Catch

First and foremost this bill has only passed the house and has not passed the senate yet so I would advise against "Counting on it". If this bill passes the senate there will be a "Recapture Rate". A Recapture rate means that a % of this money will have to be paid back over time. The Recapture rate for this bill is 6% per year for 15 years and if the home is sold before 15 years then the remainder of the credit is recaptured. The recapture payback period begins 2 years after the credit is taken. $7,500 x 6% = $450 per year at 15 years = $6750. $6750 is the amount you must pay back over a 15 year period of the $7,500. Think of it as a negative interest loan. You have taken out a loan for $7,500 at 0% interest and you only have to pay back 90% of the loan. Just taking the tax credit and using it to pay itself back you make 10% but there are ways to make this tax credit work for you.

Investing

Since you have 2 years before the recapture begins why not invest the money for 2 years in a high yield money market account? If $450 a year to pay back is not a big issue to you why not keep the money in the money market account until you sell your home? Put the money back into your home or consolidate some high interest credit cards. The possibilities of how to make this tax credit work for you are virtually limitless but each situation is different.

Tax deductions

While real estate tax deductions are not anything new it is frightening how many home owners don't know about them, understand them, or take advantage of them. When you purchase a house you can deduct mortgage interest, mortgage insurance, and a portion of you property tax from you income tax. This is a huge year over year savings for most people.

How to Lower Your Monthly Payment

Here is a strategy many savvy home owners use to lower their monthly payments. First work with a Realtor® who understands the tax advantages to buying Real Estate and is current on any new tax changes. Second work with an accountant who is familiar with Real Estate Tax deductions. For references please contact me. Here is an example of how to use the tax savings toward your monthly payments giving you more breathing / fun / saving / investing / whatever room every month.

Lets say you purchase a new home for $225,000 and your household income is $70,000 per year. For this example you have obtained and FHA loan at 6% interest and the property taxes are roughly $1000 / year.

Your total monthly payment with your Principal, Interest, Taxes, Insurance, And Mortgage insurance would be roughly $1563.57 per month. Given the information above your tax savings based on real estate deductions would be an estimated $3,400. Take this number and divide it by 12 and you will have a monthly tax savings of $283.37 against what you would normally pay in taxes just because you own a home. Next take your monthly payment and use the money you save by owning a home toward your payment. $1563.57 - $283.37 = $1280.20 per month is now your "Actual Monthly Payment". You have just effectively reduced your monthly payment by 18%.

Beating the dead horse

Real Estate is the foundation for wealth building in this country but remember there is a right way and a wrong way for everything. Be smart with your money and get the help of a knowledgeable Realtor® to make the most of your home buying dream. Take advantage of the tools put in place to help you succeed and join the millions of home owners nationwide who are NOT in danger of losing their homes.