New tax credit aims to help housing industry

New federal legislation that offers first-time home buyers a $7,500 tax credit is aimed at helping both new home buyers and struggling builders who need to spur home sales in a weakened economy.

But advocates within the Flathead's housing industry advise first-time buyers to make sure they fully understand the incentive.

The Housing and Economic Recovery Act of 2008, signed into law on July 30, allows first-time home buyers to take the tax credit from the purchase of a single-family home, townhome or condominium apartment. The program has income limits and the money must be repaid over time.

"It can be good for some, but they need to go in with their eyes wide open," said Doug Rauthe, director of Northwest Montana Human Resources. "It looks like free money, but it increases indebtedness, so it affects a homeowner's ability to pay back their mortgage. It's a two-edged sword."

The credit essentially serves as an interest-free loan to be repaid over 15 years. A home buyer claiming the full $7,500 would repay the credit at $500 per year.

Buyers can take the tax credit on their 2008 or 2009 federal income-tax return. Those who close on their home in 2008 take the credit on their 2008 tax return. Buyers in 2009 have the option of taking the credit on their 2008 or 2009 returns, according to information provided by the National Association of Home Builders.

To qualify, buyers must close on the sale of a home on or after April 9, 2008, and before July 1, 2009.

Cal Scott, a Kalispell housing advocate who operates a nonprofit housing education and counseling organization called ETHIC (Encouraging the Homeownership Ideals for Communities), said he has concerns about the disclosure end of the program because the IRS has not yet issued documentation that explain the process of handling the tax credit.

Without information "from the horse's mouth," the principal housing industry associations, such as the National Association of Realtors, don't have any finite information about the new legislation, only their own analyses of how it will work.

"That bothers me," Scott said. "They [loan brokers] are making promises and statements without the full facts and disclosures" and are closing loans on the "hope and promise they [the home buyers] will get the $7,500."

Scott has the same concern as Rauthe about the potential for first-time buyers getting into financial trouble by using the tax credit as "free money."

"People don't really understand this is a payback," he said. "A lot of lenders tout it as a panacea and that's not right. The carrot needs to be defined."

The tax credit can't be combined with loans from the Montana Board of Housing, so that eliminates a financing option for first-time buyers right out the chute, Rauthe said.

The Board of Housing, a state housing finance agency that's largely privately funded, sells tax-exempt mortgage revenue bonds, then uses the money to buy mortgages from local lenders. The new tax credit cannot be combined with a mortgage revenue bond program such as that of the Board of Housing because of the "double-dipping" effect, Scott said.

Jeannene Maas, a training and development specialist with the Montana Board of Housing, said her agency, too, is still figuring out the nuances of the new legislation.

"The educational component [for home buying] just got more complicated," Maas said.

A Board of Housing agency memo distributed Aug. 14 noted it's not clear yet whether or not the tax credit can be combined with a mortgage credit certificate, and pointed out discrepancies in the federal definition of first-time home buyer.

"These differing definitions and scenarios serve to underscore the growing need for home-buyer education and appropriate referrals to qualified tax professionals," the memo stated.

Katie Chamberlain, executive officer of the Flathead Building Association, said she's trying to get the word out about the new tax credit and hopes it works as it's intended - to stimulate the housing industry.

Real-estate prices have dropped, interest rates are still low and mortgage loans have "loosened up" some, she said, so it's an opportune time for first-time home buyers.

The National Association of Housing and Redevelopment Officials applauded the sweeping new housing legislation because it includes numerous provisions reflecting the association's legislative priorities, including nearly $4 billion in emergency Community Development Block Grant funding for neighborhood stabilization and a new government-sponsored affordable-housing production program.

"H.R. 3221 is perhaps the most significant piece of housing legislation in years," national association president Renee Rooker said in a message on the group's Web site. "We are pleased that Congress and the president have decided to take action to assist families and communities hurt by the foreclosure crisis, to address the nation's economy, and to bring housing issues into the forefront where they belong."

A new Web site, www.FederalHousingTaxCredit.com, explains how the tax credit works.

Features editor Lynnette Hintze may be reached at 758-4421 or by e-mail at lhintze@dailyinterlake.com