Most tax breaks for homeowners go out the window if you don't itemize your deductions on a Schedule A. And 63% of Americans don't itemize deductions. The tax benefits of home ownership accrue primarily to the affluent, who are more likely to have mortgage interest and other expenses that exceed the standard deduction of $5,450 for singles, $10,900 for married couples, and $8,000 for heads of households (many single parents).
So those with less income (who are also more likely to have credit issues and pay higher interest rates for everything they buy) also get less financial benefit from homeownership. However, the new housing reform law does throw those who don't itemize a bone starting in 2008. Even taxpayers who don't itemize deductions will be able to deduct property taxes from their income (up to $1000 for married folks and $500 for other filers). Add this incentive to the $7500 first time homebuyer tax credit and you get some real reasons to buy this year if you can swing it.
For lower income buyers, the fact that the $7500 is a refundable credit is important. In fact, the credit is not available for single taxpayers whose AGI is greater than $95,000 and married couples with an AGI exceeding $170,000. But if you qualify, even if you pay little or no tax you get the benefit of this credit. For example, Joe Taxpayer has $2,500 withheld from his paycheck during 2008. His tax liability for the year is $3,000. Normally, Joe would have to write the IRS a check for $500 when filing his taxes. However, in 2008 Joe became a first time home buyer. So he gets a $7,500 tax credit. Instead of writing a check for $500, Joe gets a check from the IRS for $7,000 (the $7,500 credit minus the $500 he would have owed). Pretty sweet.
There is a small catch. The credit does get paid back to the IRS over time ($500 a year over 15 years). Or if the home is sold, then the remaining credit would be due from the profit of the home sale. If there isn't enough profit from the home sale, though, the credit is written off and you don't have to repay the IRS. So if you buy a house, live in it for a couple of years and sell it, even if you don't make money on the deal you're still $6,500 ahead (the $7500 credit less the $1,000 repaid by you).
