31 July 2008 - You've probably heard by now that on Wednesday, President Bush signed a massive housing relief bill into law, which includes provisions to strengthen the nation's financial system and help homeowners facing foreclosure. But one of the best parts of the bill is a temporary tax credit for first-time home buyers of up to $7,500.

The tax credit, which can be used on any home purchase made between April 9, 2008, and July 1, 2009, will provide a significant financial incentive for home buyers to get back in the market. The amount of the credit will be 10 percent of the cost of the home, not to exceed $7,500, and the credit will be phased out at a certain income level. (Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full credit.)

Another qualification is that the taxpayer must be a first-time home buyer, meaning the purchaser (and the purchaser's spouse) may not have owned a principal residence in the three years prior to the purchase. A property is eligible for the credit if it is any home that will be used as a primary residence; this includes single-family residences, townhouses, condos, etc.

The credit will effectively be a dollar-for-dollar reduction in what the buyer owes in income taxes during the year the credit is taken. Lawrence Yun, chief economist of the National Association of Realtors, provides this example:

Let's say you complete your normal tax return and you find that you owe $1,000. You then apply the tax credit of $7,500 and the government sends you a rebate check for $6,500. This is a great incentive for buyers because it provides a large financial resource in the year of the purchase - a time which is particularly important because buyers have made large expenditures for down payments and closing costs.

One item to note, however, is that the tax credit is not a full credit; a portion of the credit must be repaid each year for 15 years, essentially making it an interest-free loan. If a home is sold before 15 years, then the remainder of the credit would be repaid from the sale profits. If there was insufficient profit, the remaining credit payback would be forgiven.

Smart consumers will note that the money they are given now is worth far more now than it would be worth in 15 years because money loses its value due to inflation. A savvy buyer may want to take the value of the tax credit and pay off a high-interest credit card or put the money toward investments with high rates of return. If a homeowner put this money toward extra payments on his or her mortgage, he or she would save substantially on the interest paid over the life of the loan. Even in the worst-case scenario that you had to repay the credit over 15 years - you would still come out ahead if you put the money to work.

It's also worth mentioning that home buyers who take advantage of this new tax credit will also reap the benefits of traditional homeownership tax incentives, including deductions for mortgage interest and property taxes paid.

Other provisions in the bill include a program to help borrowers with troubled mortgages refinance into loans backed by the Federal Housing Administration, which is expected to help an estimated 400,000 homeowners nationwide. Another provision in the bill permanently increases both the conforming loan and FHA limits. Ultimately, this means buyers will have greater access to affordable and stable mortgage products.

For more information about the tax credit and home-buying opportunities in your area, visit www.federalhousingtaxcredit.com or contact your local Realtor.