by P.H. Sampson

Created on: March 03, 2009   Last Updated: March 04, 2009

"Buy low, sell high" is the mantra for all investors. Following drastic drops in the real estate market, 2009 may be the perfect time to get the first part of the equation right by buying a house. In addition to low prices, first-time home buyers can benefit tremendously from recent changes to the federal tax code. A newly enacted first-time home buyer tax credit provides an enormous incentive to invest in a new home.

First-time home buyers, defined as purchasers who have not owned a "primary residence" within the last three years, can receive a tax credit worth 10% of the home's purchase price, up to $8,000. All they have to do is purchase a "primary residence", as defined in the Internal Revenue Code, during 2009. It should be noted, however, that the credit could be forfeited if the purchased property is not used as a primary residence for the next three years.

Single taxpayers can claim the full credit so long as their Modified Adjusted Gross Income (MAGI) is no more than $75,000, while married taxpayers who file jointly with their spouse can claim the full credit so long as their MAGI does not exceed $150,000. Purchasers whose MAGI exceeds these income limits can claim a reduced credit that diminishes as income rises until phasing out completely when the taxpayer's MAGI reaches $95,000 for single taxpayers and $170,000 for joint filers.

While this first-time home buyer tax credit is similar to one enacted in 2008, there are key differences that make this new tax credit far more appealing to potential home buyers. First off, the maximum credit has been raised from $7,500 to $8,000. More importantly, this credit does not have to be paid back like the 2008 credit did. The 2008 credit merely amounted to an interest free loan; whereas the 2009 credit has the potential to permanently put $8,000 back in the pocket of first-time home buyers.

In addition to these benefits, the 2009 first-time home buyer tax credit is completely refundable. This means that if a first-time home buyer's tax liability does not equal the tax credit the home buyer is eligible to receive, the IRS will send the home buyer a check for the full amount of the credit minus the home buyer's tax liability. Savvy taxpayers can also access tax-credit funds in advance to finance their property purchase. All the first-time home buyer would have to do is reduce tax withholding by the amount of the expected tax credit and then direct those funds toward a down payment.

To sum up, anyone who has not owned a primary residence in the last three years can receive a tax credit worth up to $8,000 by purchasing a primary residence in 2009, so long as their Modified Adjusted Gross Income does not exceed certain limits. This credit does not have to be paid back and can be earned even if the home buyer's tax liability does not equal the full amount of the credit. These incentives, combined with falling prices, make purchasing real estate in 2009 a promising proposal for first-time home buyers.

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