Beware of Congress's new tax credit for first-time buyers - it's really a loan

There's been a lot of discussion about how much the new housing bill passed by Congress will help individuals facing foreclosure. Some will be able to keep their homes, to be sure. But there's a different provision I want to focus on: the tax credit for first-time homebuyers.

A tax credit is much more valuable than a deduction. A credit reduces dollar for dollar the amount of tax you owe. A deduction merely reduces the amount of your income that is taxable.

Under the new law, certain homeowners will be eligible for a tax credit equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. The credit is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.

When I saw the $7,500 amount I thought, not a bad tax credit. But there are all kinds of catches. Before you rush to take advantage of this, be aware it's a loan cloaked as a credit.

"Essentially this is a loan administered through the tax code," said Gerald Prante, an economist with the nonprofit Tax Foundation. "I question whether the tax code is the best way to do this."

The loan has about the best rate and term you can get. It's interest-free. Buyers would be required to repay the government over 15 years in equal installments for any amount received.

So let's say you qualify for the maximum $7,500. Considering the price of housing, just about every first-time buyer would qualify. The terms would mean a yearly loan payment of $500 for 15 years, or about $41.67 a month.

You have to begin repaying the credit in the second tax year after you purchase the home. If you sell the house before you pay off the credit, the entire amount becomes immediately due. However, if you sell and the gain is less than the credit, then you only have to repay up to the amount of gain. If the homeowner dies, any outstanding amount is forgiven.

The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009.

Another catch: High-income buyers won't qualify for the credit. You can claim less the more you earn. The phase-out starts for single filers with adjusted income of more than $75,000 and $150,000 for joint filers. It completely phases out at $95,000 for singles; $170,000 for married couples filing jointly.

The law would provide homeowners who claim the standard deduction with an additional standard deduction for state and local real property taxes. The maximum that may be claimed under this provision is $500 ($1,000 for joint filers).

This particular provision will be helpful to taxpayers who don't itemize. Ah, but there's a catch to this deduction, too. It applies only for the 2008 tax year.

I'm not crazy about the tax credit. This loan masked as a credit increases a homebuyer's debt load. Yes, it will let some people reduce their tax burden, but the benefit is only temporary.

Michelle Singletary is a columnist for The Washington Post.