Buying a new home? Learn more about the $7500 tax credit before you go househunting.

Last week, the much anticipated Housing Assistance Act of 2008 was passed. You may have seen headlines about one of the Act's major provisions -- the availability of a $7500 tax credit for first time home buyers. This credit is generating a lot of buzz, but it is important to understand the finer points of the credit.

Here is how it works:

People who have not owned a home in the past three years can qualify for the credit if they close on a home between April 9, 2008 and June 30, 2009. The credit is equal to 10% of the purchase price of the home but cannot exceed $7,500 for a married couple filing jointly or $3,750 for single filers. The home must be your principal residence. If you are married and earn more than $150,000, or if you are single and earn more than $75,000, the amount of credit you can claim is reduced. The credit is eliminated entirely for married filers with AGIs greater than $170,000 and single filers with AGIs greater than $95,000.

And remember, credits are significantly more valuable than deductions because a credit reduces the amount of tax you owe on a dollar for dollar basis. Here is an example: if you prepare your taxes and you owe the IRS $6,500, your $7,500 tax credit would eliminate your entire tax bill. PLUS, the you would get a check back from the Treasury in the amount of $1,000. A pretty sweet deal.

If this seems a little too good to be true, it is in one regard. While technically called a tax "credit", you actually have to re-pay it over time. Beginning in the second year that you own your home, you must begin making "payments". If you were entitled to the full $7,500 credit, you would be paying back $500 per year for 15 years. (One nice aspect of the credit is that if you sell the home later and you have no gain, you do not have to repay the previously claimed credit.) So, the credit is really more like an interest free loan. It is still valuable, but it isn't quite the incredible deal that some people think it is.

Other note-worthy aspects of this new bill:

A "plus": Homeowners who don't itemize their deductions will now be able to deduct up to $1,000 in property tax ($500 for single filers) while still claiming all of the standard deduction. As of now, this tax break is only available in 2008. We will have to see if it is extended.

A "negative": The pro-rating of the $250,000/$500,000 exclusion on gains on the sale of primary residences based on how long you have lived in your home. Now, if you only live in your house for 1 year and sell, you can only exclude 20% of the gain, up to a maximum $250,000/$500,000.