The Housing and Economic Recovery Act of 2008 is now law although some provisions will not be effective until 2009. Over the next week or so, I’ll be posting about some of the provisions that may be of the most interest to buyers and sellers of Flagstaff real estate. In my weekend alert, I mentioned that the new law contains a provision to allow a tax credit of up to $7500 for first time home buyers. The law and the media have been calling this a tax credit. What it is really is a loan – you’ll be repaying it on future tax returns – more on this tricky provision below.

First of all, the amount of the credit is not $7500 but 10% of the cost of the home, not to exceed $7500.  Flagstaff homebuyers will get the full $7500 because there simply are not Flagstaff homes priced less than $75,000. That is not likely to change – even the older, small condos would have to fall in price quite a bit further to get below this.  And, of course, this law will have the effect of slowing the price slide by bringing more buyers into the market.

Any home purchase is eligible for the credit so long as it is to be used as the home buyer’s principal residence. The buyer can purchase a Flagstaff condo, townhome, or single-family residence. The buyer and the buyer’s spouse must not have owned a home that was their principal residence any time in the last three years. This law is intended to encourage first time home buyers and those who have been out of the market for a few years. However, if you have owned a vacation home or a time share, you can qualify. If spouses have long-distance relationships with separate principal residences, they can buy two, but they have to split the credit.

The tax credit will apply to the tax return in the year the home is purchased. So, if you purchase in 2008, the credit will apply when you file your 2008 federal tax return in 2009. To make things more complicated, if you purchase before July 1, 2009 and want to amend your 2008 tax return, or haven’t filed it yet at that point, you can claim the credit on your 2008 return even though you made the purchase in 2009. The credit (loan) opportunity ends completely on July 1, 2009 – so purchase your Flagstaff home before that! (Of course, Congress could always extend this tax break next year, but for now, the law is that it ends in 2009.)

More good news: (1) This is a “refundable credit,” meaning you get it even if you have no taxable income to report. (2) The loan is at zero percent interest. (3) Use of the credit cannot throw you into the Alternative Minimum Tax.

Here’s the deal on why it’s really a loan and not permanent money in your pocket: You have to repay it over a 15-year period starting in the second year after the taxable year in which the home is purchased. So, buy in 2008, and you’re first repayment (as part of your tax return filing) will be on the tax return of 2010, which you’ll file in 2011. So, for Flagstaff home buyers, you get $7500 in 2009, but in 2011, and for each of the next 14 years, you’ll pay an additional $500 in taxes to return this loan to the IRS.

The bad news: If you sell the home, the entire amount of the credit must be repaid – that could be an unpleasant surprise when you file your tax return the year after selling this house, so be prepared. Also, if you have years where your income was so low that you would not need to file a tax return, you’ll have to file it anyway to report and pay your credit repayment. This requirement is waived if the owner dies, and there are special provisions in the event of divorce or other emergencies. (Always consult a tax professional!)

Good news or bad news, depending on who you are and your politics: The credit (loan) is not available to the very wealthy. For married couples, filing jointly, the credit phases out for those with modified adjusted gross income between $150,000- $170,000. For singles, the phase-out is modified adjusted gross incomes $75,000-$95,000. (Check with your tax advisor for the definition of that term that I just used twice without quite knowing what it means!)

The good news for those who purchased a home on or after April 9, 2008 – the law is retroactive to that date!

So, all of you folks who have been sitting on the fence, waiting to buy your new Flagstaff home, take the encouragement from Congress and give Team Heitland at RE/MAX Peak Properties a call. It’s time to start looking for your new home!