Michelle Singletary | The color of money

Questions and answers about the first-time home buyers' credit

By Michelle Singletary
August 17, 2008
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Part of the Housing and Economic Recovery Act of 2008 authorizes up to a $7,500 tax credit for qualified first-time home buyers. Based on the questions I'm getting from readers, many people are ready to jump at this money like Scooby Doo panting after Scooby snacks.

To help those considering this credit, which is really a loan, I talked to Eric Smith, a spokesman for the Internal Revenue Service, which will be handling the implementation. Following are some questions sent to me by readers and answered by Smith:

Q. Can you change your W-4 form so that less income tax is withheld to get the money sooner than applying for the credit?

A. If you want this money now rather than waiting to file your 2008 tax return, you can adjust the number of withholding allowances you take on your W-4. The W-4 has a worksheet to help you figure out how many personal allowances to take, based on what tax deductions or credits you expect to claim on your return.

"As a general rule, people should adjust their withholding to reflect deductions and credits," Smith said.

Q. If you take this tax credit for 2008, when would you begin owing payments?

A. Repayments begin the second tax year after you take the credit. So if you claim the credit on your 2008 tax return, you have to begin paying back the money in 2010.

Q. What happens if someone does not pay the debt back on time or at all?

A. The unpaid loan will be treated like any delinquent tax obligation, meaning standard IRS interest and penalties apply. For example, interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3 percent.

Q. Will this be a debt that has to be settled at closing if you sell the house?

A. This debt isn't tied to your home but rather to you as an individual taxpayer. It's not likely the outstanding loan will be required to be paid at the closing table, Smith said.

If you sell your home or it is no longer your principal residence, then any remaining loan balance would be due immediately. If there is no gain, however, the remaining loan is forgiven. The gain will be figured the same way as profit on the sale of a home under typical IRS rules taking into account purchase price, selling expenses and previous loan payments.

In the case of someone who moves but doesn't sell the home, if there is an outstanding loan balance the homeowner would have to come up with the money out of pocket the same tax year once the home is no longer the principal residence.

Michelle Singletary is a columnist for The Washington Post. She can be reached at

SOURCE: Bloomberg News

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