This article in the Globe today asks "Is the $7500 first time buyer tax credit worth it?"

I have heard similar questions from our clients here as well, so obviously word is passing along that there is the tax credit money available.  The question is will you or won't you utilize it?   As a follow up to my previous post a couple weeks ago, we have gotten more information on the inner workings of the tax credit and how it is to be utilized and the Globe article raises an interesting question.

The tax credit works like this:

• If you are a first time homebuyer (who fits within the income limits - it phases out if you make more than $75,000 filing single or $150,000 joint) and purchase a home between April 9, 2008 and July 1, 2009, you are eligible for the tax credit if you choose to take it.

• Tax credit means your total tax due when you file your return is reduced by $7500 (if you get a refund then you get an additional $7500 rebate).

• You don't get the money until you file your taxes though so it cannot be used prior to closing.  You still need your own money for closing cost and down payment money.

What's the catch?  The "credit" is actually a 0% interest loan repayable over 15 years.  So you pay it back to the government at a rate of $500 per year over the next 15 years OR if you sell the home prior to 15 years, whatever amount you still owe is repayable in full upon selling the home - the money due will be taken from the proceeds of your sale.

More questions and answers about the tax credit here (pdf).

So overall it's a nice benefit to ease the financial burden in the first year of homeownership - if you have a burden.  After all, it's free money (meaning no interest).  After coming up with a down payment and closing costs, it leaves you a nice cushion for emergencies or other necessary expenses.

The globe article asks what you should do if you don't need the money and the answer it gives is that you shouldn't take it.  The reporter interviews a buyer about the credit:

"If someone knocked on your door and said, 'Hey, I have $7,500 to lend you at zero percent interest, and you can pay me back over 15 years,' would you take the money?"

"Probably not, unless I had something specifically I needed the money for," Kiser said.

OK, so what if you need furniture? Would you take out a 15-year loan, even at zero percent?

"No, I wouldn't," she said. "I would save up the money."

I don't agree with this.  If it's me, I'm taking the money all day long.  Somebody is offering me $7500 interest free, I'll take it.  The way I see it is that it is saving in reverse.  Using the furniture example, you can save $500 a year over the next 15 years and get the furniture then OR you can get the furniture now and pay $500 a year over the next 15 years.  Either way, it costs you $500 per year for the next 15 years but you get usage of the furniture a lot earlier.

The only risk is if you have to sell your property within a couple years and prices have not gone up.  So when you sell, you have to consider your costs including owing, say $6000, back to the government on top of paying back the loan and any other transactional costs like broker and legal fees.  You may not be able to get enough for your home to cover all your costs if prices don't go up.

So basically - I would be careful - I wouldn't take the money and blow it on unecessary items - like that trip to Tahiti (nice daydream!).  If I didn't need it, I would put it in the bank and earn interest....even a risk free 4% in a savings account is better than nothing (worth $300 per year in your pocket!).  Plus you would have the money right there if needed for an emergency or to pay back in full if you sell.  Makes sense to me anyway!

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