Uncle Sam to 2008 First-Time Homebuyers: Pay Up!
Life + Money

Uncle Sam to 2008 First-Time Homebuyers: Pay Up!


Brad and Elizabeth Johnson will receive $500 less on their tax refund than they expected to this year. That’s because they – along with 1.2 million other taxpayers – are on the hook for more than $8.3 billion issued by the U.S. government’s 2008 first-time home buyer tax credit program. The credit was originally a type of interest-free loan, but now it’s up for collection. (The government waived the payback rule for homes purchased in 2009 and 2010, unless the home ceased to be the taxpayer’s main residence within a three-year period.)

Bottom line: Uncle Sam wants his money back.

While an unemployed Brad Johnson says his family won’t be crushed by the repayment – he’s still expecting a tax refund, after all – he does hold some buyer’s remorse. “We wish they [the lawmakers] would have transitioned our tax credit into [another] program,” Johnson said. “We were definitely disappointed. If we had just waited another year we wouldn’t have to pay it back.”

Many may have forgotten that the “tax credit” came with caveats at the time and was an interest-free loan to be repaid in 15 equal annual installments. If an individual bought a home in 2008 and claimed the maximum credit of $7,500, for example, the repayment amount is $500 per year.

Since then, two subsequent tax credits have followed to help boost the weak housing market and further spur home sales. All three versions of the tax credit are expected to result in a revenue loss to the government of about $22 billion, according to the Government Accountability Office. The IRS, meanwhile, has been sending out reminders to those 2008 homebuyers who might have forgotten it’s time to ante up. To repay the credit, individuals need to file a Form 5405 as an additional tax on their returns.

“I don’t have sympathy,” said Steve Ellis, vice-president of Taxpayers for Common Sense, a non-partisan advocacy group. “These are the rules and they were able to benefit. They got something that the homeowner in 2007 didn’t get.”

As the unemployment rate drops and spending increases, Americans still have little room for added expenses with rising gas and food prices and stagnant wage growth. Andreas Carbacho-Burgos, an economist with Moody’s Analytics, expects the payments to possibly dampen household expenditures, but not enough to offset the Social Security payroll tax, which saves Americans an average of about $2,800, according to the non-partisan Tax Policy Center.

Meanwhile, experts continue to debate if the 2008 tax credit lured in more first-time homebuyers than would have otherwise bought a home. Carbacho-Burgos says the market barely registered any change in 2008. “For a tax credit to be effective, it has to create expectations that this is something that is going to be a permanent transfer of income, which is in effect what a tax credit is,” he added. “The 2009 and 2010 credits were effective because they weren’t loans.”

Walter Molony, communications director with the National Association of Realtors, says homes sales would have declined even further without the credits and that they helped “stop the bleeding.”

Home sales remain low nearly five years removed from the peak of the housing bubble, and new research from Capital Economics shows cash buyers and investors are responsible for 70 percent of the increase in existing home sales since last July. First-time buyers have been responsible for just 6 percent.

Americans purchased fewer new homes in 2010 than in any other year dating back to 1963, according to the Commerce Department. As for the merit of issuing another tax credit in the future, experts say given the climate of deficit slashing, issuing future homebuyer tax credits would be out of the question. “They did their job in stabilizing the market,” Molony said. “We don’t need further tax stimulus. You want to see the market stand on its own two feet.”

Related Links:
Report: First-Time Homebuyers Fade From Market  (The Wall Street Journal)
12 Tax Breaks Homeowners Need to Know  (Accounting Today)
For Some, It’s Payback Time for Homebuyer Credit (Chicago Tribune)