If you are a first time homebuyer – that is- if you are a taxpayer who had no ownership interest in a principal residence in the United States for the three year period prior to the purchase of your principal residence and you purchased your residence after April 8, 2008 and before July 1, 2009, then you are entitled to a refundable tax credit equal to 10 percent of the purchase price of your residence not to exceed a total credit amount of $7,500. For married individuals filing separately, the total credit amount cannot exceed $3,750.

However, based on your income level there are limitations on the amount of the credit that can be taken. During the year of purchase, the credit begins to phase out for married couples filing jointly with modified adjusted gross income (AGI) of $150,000 and is completely phased out at $170,000. Simply put, if you are married filing jointly and your AGI is over $170,000 you will not receive a tax credit. If your income is over $150,000 but less than $170,000 the credit is reduced for every dollar of AGI over $150,000 based on a formula specified for the phase out. For single taxpayers the phase out is between $75,000 and $95,000.

If the house ceases to be the taxpayers principal residence for any reason including disposition of the residence, during the tax year that the credit is claimed, then the IRS will disallow the credit.
The credit is meant to be a loan and not a permanent reduction of income tax. Taxpayers must repay the loan over a 15 year period – interest free. However, if the house ceases to be the taxpayer’s principal residence, any unpaid balance must be recaptured (paid back) in the year the residence is sold or no longer is the taxpayer’s principal residence. The amount of the credit recapture (the amount that must be paid back) can not exceed the amount of the gain from the sale of the residence to an unrelated person.

The credit must be claimed on the taxpayers 2008 or 2009 tax return. Taxpayers should consider the impact of the credit and adjust wage withholding or estimated tax payments if appropriate.