- It means that if you have not owned a home for the past 3 years, you are eligible for up to an $8000 tax credit on your federal tax return. If you owe less than $8000 in federal income tax liability, lets say hypothetically you owe $6000, then you get $2000 back when you file your taxes. If you owe no money in Federal Income tax, then you get the full $8000 in the form a check from the US Treasury.
- If you have owned a home and kept it as your principle residence for 5 consecutive years of the past 8 years, you are eligible for up to a $6500 tax credit if you purchase a new home as your primary residence, as long as the purchase price of the home does not exceed $800,000 dollars.
Here is a detailed chart of how the expanded tax credit works in comparison to the original tax credit (click on he picture to get an enlarged version which you can read):
Whether or not you support this program, it is important to understand the chief benefits of having a strong real estate market and how it pertains to emerging from this period of economic malaise. Let's face it, the reason that we continue to stay in recession mode is us. That's right, US, the consumer. Consumer spending has historically accounted for about 2/3rds of economic activity. When the consumer loses confidence, he usually dramatically cuts spending on consumer discretionary items such as automobiles, televisions, housing renovations, etc. (big ticket items). People instinctively hoard cash when they fear of losing their job or getting downward pay adjustments. Seeing the latest unemployment number (the worst since 1983) come in at a whopping 10.2% does not help either.
Politicians know this. So, in times like these they try to hatch schemes to get you, the consumer, to start spending again. They usually attempt to do this by playing around with the tax code to incentivize constituents into doing specific things like buying homes. Although buying and selling homes is great (especially for the real estate industry), you the taxpayer may ask "How the hell does it help the rest of us?!" The answer may surprise you.
Statistically, home buyers on average spend approximately 20% of the homes value within the first year of ownership. For example, statistics suggest that a family buying a $100,000 home have a high likelihood of spending $20,000 that they would have otherwise not spent if they didn't purchase a new home. This is a consumer led recession and it's going to require the consumer's participation in order to get out of it.
If you have been following Wall Street recently, investors have been obsessive over revenue growth for companies. Although many companies have increased profitability dramatically by laying off workers & cutting costs, their revenue growth has lagged analysts expectations because the consumer is responsible for fueling revenue growth. Expect mortgage rates to remain low until the consumer shows signs of life. Once investors are affirmed that consumers are spending again, watch the institutional money fly off the sidelines (cash & cash equivalents) and into riskier asset allocations (stocks & bonds). This is the point in time when mortgage rates will increase significantly.
