Impact of first-time homebuyer tax credit still being feltby Peter Miller
The Treasury Department is now estimating that improper deductions worth more than $500 million have been taken under the government’s tax credit program for first-time homebuyers. This will elate critics of the program and seriously miss an opportunity to help the ailing housing market. That said, I think the program served an important purpose, despite this fraud.
According to a report from J. Russell George, the Treasury Inspector General for Tax Administration (the TIGTA in Treasury-speak), we have a lot of creative taxpayers out there who took improper deductions. This is hardly surprising under any circumstances, but in the particular case of the first-time homebuyer tax credit program, it’s a wonder that the results are not far worse because the program was ridiculously complex.
It’s generally estimated that 40 percent of all home purchases are made by first-time homebuyers. To increase real estate demand and rebuild the market during a tumultuous time, the idea of a credit for first-time homebuyers arose in Washington. This seemingly straightforward program soon became complicated and confusing because of all the different versions and updates along the way.
The versions of this program include:
- 2008 — HR 3221: first-time homebuyers can get a tax credit equal to 10 percent of the purchase price but not more than $7,500 — $3,750 if single. The credit can only be used to buy a primary residence, you must be at least 18 years old, buyers cannot have owned a home during the past three years, and there are income limits as well. The catch: this legislation did not create a tax credit, regardless of what the headlines said. It created a tax deferment – buyers had to repay the money over a 15-year period after the property is sold.
- 2009 — A true credit is created of up to $8,000. There is no repayment required.
- 2009 — A second change allows homeowners to get a $6,500 credit when they sell.
- 2010 — The program is set to generally end on April 30, 2010. However, the program continues for qualified vets until April 30, 2011.
So what could possibly go wrong? According to the TIGTA, just about everything went wrong.
First: some 13,500 taxpayers claimed the credit before they actually bought a home.
Second: many claiming the credit did not qualify because they had owned a home during the past three years. An estimated 47,600 taxpayers took this deduction inappropriately, meaning the IRS might be able to recover $326 million.
Third: 96 teenagers took the deduction.
Fourth: almost 1,100 inventive prisoners claimed to be first-time homeowners.
Fifth: more than 5,000 taxpayers claimed the credit for homes purchased before the program started or for multiple properties.
How much did the credit cost us? Was it worth it?
For the processing years 2009 and 2010, according to the TIGTA, the IRS issued homebuyer credits worth $26 billion. That’s a huge bill, one that will no doubt garner some complaints given some of the dubious claims that have been made under the program.
But the more important point is this: to re-start the housing market we need as many buyers as possible, especially first-timers.
First-time homebuyers are important to the real estate market because when they purchase existing homes it means that current owners are also moving somewhere. To a large extent, owners (who are selling) become buyers — but only if someone will first purchase from them. Eliminate a first-time buyer and you also eliminate a strong line of potential transactions.
The credit for homebuyers ended with contracts made before May 1, 2010, except for veterans who have until April 30, 2011. The market since then has been woeful.
Market still struggling without the credit
Government figures tell us that U.S. home prices rose .8 percent from March to April 2010. In April 2010, home values were 12.8 percent below their April 2007 peak.
Now, the latest federal numbers tell a different story. We’re making no progress on the price front. As of January 2011, home values had declined 16.5 percent below April 2007 peak, despite the fact that mortgage rates remain around 5 percent.
The truth is that the money spent for the first-time homebuyer tax credit was cheap. Some of it from the deferred credit phase (2008) will be repaid to the government. However, the rest went to a worthy cause — the re-establishment of the housing sector, and that’s something which must be done if the economy is to grow again and to generate jobs once more.
Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.